Not a day goes by when we don’t hear about the frolickings of bitcoin.
The digital currency has certainly divided opinion. Punters are forever reminding us of the mammoth gains bitcoin made last year. And in the same breath, comparisons are continually being drawn between trading these cryptocurrencies and gambling.
As bitcoin reached an astronomical high of more than $19,000 on 16 December last year, the barrage of warnings that it could all come crashing down have become increasingly intense.
Investment guru Warren Buffett brought his thoughts to the table last week by saying he was almost certain that bitcoin “will come to a bad ending”. “I get into enough trouble with things I think I know something about. Why in the world should I take a long or short position in something I don’t know anything about?” he said during an interview with CNBC.
But investment bubbles aside, let’s look at how cryptocurrencies are touted to trade in the future.
Looking to the future
One of the biggest investment stories over recent months was the launch of bitcoin futures, which essentially offer exposure to the cryptocurrency, without actually having to own it.
The launch has garnered a lot of criticism, with concerns revolving around the instability (or lack of regulation) of bitcoin exchanges, and the fear that encouraging more people to enter the market at this point of time could exacerbate an already volatile asset class.
There’s also the risk that the bitcoin market could collapse if a stampede of futures traders all sell their contracts at once.
Bitcoin futures got off to a good start immediately after their debut last month. But they’ve been on a downward spiral since the beginning of 2018, and now sit at the $14,000 mark, down from an opening price of $15,000 at launch, meaning many futures investors are set to face large losses when the monthly contracts expire tomorrow.
If anything, this episode just draws attention to the volatile nature of the cryptocurrency.
Despite the drop in price, it’s likely we could see the creation of more futures markets going forward, as demand for crypto continues to grow.
The arrival of bitcoin exchange-traded funds (ETFs) also seems relatively imminent, despite the US Securities and Exchange Commission (SEC) rejecting a proposal from Tyler and Cameron Winklevoss back in March.
Last week, we saw several players – including Direxion Shares ETF Trust, Exchange Listed Funds Trust, and ProShares Trust – ditch their proposals to create a bitcoin ETF after the SEC expressed concerns around the valuation and liquidity of the cryptocurrency.
Rather than holding bitcoin directly, these proposed ETFs would be linked to price movements in the newly-established bitcoin futures market.
Despite the string of shelved plans, it doesn’t necessarily mean bitcoin ETFs are off the cards. Perhaps we could see them come to market at a later date, when the hype dies down and the currency becomes more stable.
While it’s impossible to know when that will be, the arrival of bitcoin ETFs is sure to bring more retail investors into the crypto market.
Place your bets
Making bets on whether bitcoin will rise or fall in price is unlikely to curb criticism that investing in cryptocurrency is akin to gambling.
But the risky spreadbetting industry has been keen to muscle in on the bitcoin game, much to the dismay of pundits who warn this could exaggerate losses.
Yet that’s unlikely to stop some gutsy traders from speculating. In fact, as of today, investors will be able to bet on bitcoin via the SpreadEx platform.
Managers of mutual funds are pretty sceptical of bitcoin’s sudden rise to fame, which is unsurprising given that these professional investors tend to avoid taking whimsical bets on things they don’t fully understand. And no one really fully understands bitcoin.
But that’s not to say there are no active funds with cryptocurrency exposure in the market. For example, Ark Investments oversees two actively managed funds which have exposure to bitcoin. Rather confusingly, both of these funds are labelled ETFs, despite them being actively managed.
Investors can already use traditional investment vehicles, like Grayscale Bitcoin Investment Trust, to gain exposure purely to bitcoin without buying and holding the coins. You’ve also got eToro’s Crypto CopyFund which invests across all major cryptocurrencies, and is particularly useful for investors who are looking to spread their risk.
As time goes on, it’s likely we will see more specialist crypto funds brought to the market, particularly as people become more comfortable with it as an investment.
We could also see it become commonplace for mutual funds to start treating crypto like a traditional asset.
Digital currency is simultaneously exciting and scary. In a way, it feels like the future is unfolding before our eyes, but the uncertainty of the unknown (and the magnitude of the bitcoin bubble) understandably makes many of us wary.
But one thing seems sure: we’re likely to see the digital currency evolve as it becomes more accepted in the mainstream investment world. Perhaps only then will we understand bitcoin’s true value.