“The finicky nature of any asset whose value is not based on anything tangible can lose value just because a whole lot of people decide today is the day to sell.”
This is what Howard Hook, CFP, CPA, with EKS Associates in Princeton, NJ, had to say in a recent article appearing in Forbes regarding his concerns about Bitcoin ETFs.
The buzz in the financial industry has centered around the ability of investors to invest in the price movement of Bitcoins more easily. Recently, the Securities and Exchange Commission approved the listing and trading of several bitcoin exchange-traded products (ETFs). No less than 11 exchange-traded funds have been launched to track the price of Bitcoin.
Bitcoin is a form of digital currency that allows buyers and sellers to transact business without using an intermediary, such as a bank, to handle the transaction. Its’ allure is twofold: first, investors hope that Bitcoin will replace paper money and other forms of digital currency, such as credit cards, making it easier for people to do business while also bringing the transaction cost down; second, in a more speculative way, there is hope that as its use becomes more mainstream, the value of Bitcoin will increase.
“The value of a single Bitcoin is only based on what someone else is willing to pay for it,” Hook says. “As more buyers come into the market through the offerings of these ETFs, more buyers should push the price higher. At some point, however, if the pool of buyers runs out before the value of Bitcoin becomes more tangible, the price will begin to fall and could fall fast.”
While all asset classes have some degree of speculation, stocks and bonds intrinsically have value, he says. He sees other parts of Bitcoin troubling as well. “Since its use is not widespread, if people decide that Ethereum, for example, has a better long-term stock price potential than the price of Bitcoin, they will start selling Bitcoin and buying Ethereum instead. Bitcoin is a virtual coin, so there is no tangible property to hold. Instead, it is held in a digital wallet that contains an encryption code you must use to access it. If you lose the code, you lose access to your Bitcoin.
Since one coin can currently be worth $45,000, how would you transact business with it? You can’t shave pieces of it off to pay for groceries. It is the same problem that gold bars have.”
His hope is for greater transparency now that old-line investment firms offer ETFs to buy Bitcoin. More openness and ease of buying and selling, he says, would ultimately lead to better outcomes for Bitcoin and those who trade in it. But before that happens, he believes those that speculate on its price movements and viability as a digital currency are likely to feel some pain.
