It is perhaps rare that, as Mark Northway, investment manager at Sparrows Capital, points out a new ETP poses an “existential question” for investors but such is the case with the WisdomTree Bitcoin ETP (BTCW) launched this week.
Alexis Marinof (pictured), head of Europe at WisdomTree, argues “we have seen enough to believe that digital assets, like bitcoin, are not a passing trend and can play a role in portfolios”. Some investors may agree with his statement there are “many parallels between the cryptocurrency space and commodities”.
However, such sentiments are contentious. Extending the concept of value to currencies or gold becomes, by degrees, more tenuous, Northway suggests.
In the case of the first, they are backed by governments which are backed by real economies “so the intrinsic value of a currency is a function of expectations around national or regional economic activity, which may be enhanced or undermined by government actions”.
Then with gold, it has “limited industrial value, but its price is a function of persistent demand that far outstrips that intrinsic value”.
“That demand is partly explained by human vanity and partly by its related, time-honoured acceptance as a store of value,” Northway says. “That acceptance is bolstered by the fact that there is a relatively finite supply of gold, and the fact that it does not oxidise.”
Is gold a rational investment? Well, yes – as a counter-cyclical, defensive asset suggests Northway. “But from the perspective of intrinsic value, definitely not. And yet gold forms an accepted part of the investment landscape. This is an accident of history, largely reflected by the metal’s historical use as a global currency.”
All of which brings us to bitcoin, the motherlode of modern libertarian – not to say alt-right – theology. Cryptocurrencies, as Northway points out, “cleverly” incorporate parallels to gold – the mining process, the limited global supply, the lack of central government control, the means of payment and (potentially) the store of value. “To the extent gold can be an investible store of value, why can cryptocurrencies not become the gold standard for the 21st century?”
Northway clearly has issues. The lack of intrinsic value is clear but the confusion of price and value which markets engender is, at root, also an issue. “An asset or a risk class does not become investible simply because the market has attached a price to it, because investment is fundamentally about value. Without a linkage, however tenuous, to future cash flows or economic production, a risk class is necessarily relegated to the realms of speculation.”
What the company says:
Rafi Aviav, head of product development, capital markets and technology at WisdomTree, comments: “We have developed a solution which addresses the difficulties investors face in accessing digital assets and are bridging the gap between the underlying decentralised online blockchain technology and traditional investment structures.”
What the panel says:
Mark Northway, Sparrows Capital
Cryptocurrencies are speculative assets, not investments. They are not relevant to investors, and it is not clear that they ever will be.
It is not helpful for providers to be using ETPs to facilitate exposure to purely speculative risk classes, simply because demand currently exists; this is the natural realm of CFDs, until regulators wake up to the issue.
ETP providers, and the exchanges on which they launch, should limit their scope to providing real investors with the tools to acquire and manage value.
Chris Beauchamp, IG Portfolios
Compared to the mania of 2017, and the drama of last year, 2019’s price action has been a pale imitation. Bitcoin is no longer going to change the world within the space of a few years, and indeed is likely to merely become more like any other asset.
As a result, it has been hard to summon up the enthusiasm for bitcoin investment. The hype has disappeared, but the conundrum of bitcoin’s future remains unsolved.
The bandwagon has rolled on this year, although it has been increasingly unsteady, and the wheels have probably come off with the November slump.
Perversely, for those coming to bitcoin afresh, the lack of hype offers a promising opportunity.
Nicolas Rabener, FactorResearch
WisdomTree has a long history of providing innovative strategies, which now extends to cryptocurrencies with the launch of BTCW in crypto-friendly Switzerland.
The product competes directly with Amun’s ABTC, which manages $4m and is much more expensive with a management fee of 2.5% per annum, compared to BTCW’s 0.95%.
It is somewhat questionable why investors should allocate capital to bitcoin, but the same can be asked about currencies or other assets like gold that lack the theoretical basis for positive expected returns.
However, holding BTCW is certainly advantageous compared to creating a wallet at a crypto exchange. It is worth noting that most demand is likely from retail investors, but the ETP is only available for professional investors.