Bitcoin is a digital currency that’s evolved into a digital store of value with some characteristics of gold.
The important issue for investors is how it’s valued, which depends on a variety of factors.
The price of bitcoin may just boil down to what someone will pay for it given the circumstances.
Bitcoin’s price has surged in 2024, surpassing pandemic-era peaks. The climb has followed the approval of spot bitcoin exchange-traded products (ETPs), which opened up the cryptocurrency for investors of all stripes. Easier access may not be the only reason for the rising price. What does it even mean to put a price on this asset? And how does such a volatile asset fit into a broader portfolio?
Ashley Oerth, Associate Global Market Strategist at Invesco, and Ken Blay, Head of Research for Invesco’s Global Thought Leadership team, joined the Greater Possibilities podcast to talk about bitcoin and its potential place in a portfolio alongside stocks and bonds.
Bitcoin started as a digital currency. While it can be used in certain situations, it never really caught on as a means of paying for everyday transactions. Instead, bitcoin has evolved into a digital store of value with some characteristics of gold. But even that is a bit of a reach (at least for now) given its volatility from one day to the next. The benefits to investors include its limited supply and tempting price cycles.
I would say the sort of critical differentiators for bitcoin is the fact that it’s got this sort of supply limitation built into it. And as we’re discussing already, we’re focusing on bitcoin, but we could be discussing other cryptocurrencies as well. But bitcoin it has got this incredible brand recognition, and I think that’s helped it stay at the top of the crypto charts. Bitcoin, it was really the first cryptocurrency, and it sort of stands as representative of the entirety of the crypto space.
To some degree, the purpose of bitcoin may even be beside the point. The more important issue for investors is how it’s valued, or at least priced, which depends on a variety of factors.
I think the critical takeaway here is that you cannot really value bitcoin. You can try to price it, you could try to build a framework around its likely drivers. And so, we do have some ideas, and you highlighted a few of them, of what can be a driver here. But I think what it comes back to is what are the supply and demand factors underlying bitcoin itself, and then broadening away from that, what is the sort of financial backdrop? What are financial conditions telling us, and how does that affect the opportunity cost that’s wrapped up in holding bitcoin?
Bitcoin’s early history from inception to 2014 was a “crazy period” that included very high but very risky returns. The following 10 years were significantly closer to more recent price behavior but still included some huge price swings. There have been one-year periods where bitcoin gained 1,000%, and one-year periods where it lost more than 70%. Wild price swings can make portfolio allocation very difficult.
You couple this with the fact that bitcoin was maturing at that time and all the infrastructure behind bitcoin and that allowed the trading of bitcoin, that was all brand new as well. So, you have this thing that’s evolving around all of this noise. And so, it’s really hard to make any inferences about how bitcoin is going to act relative to stocks or to bonds or all of that, for me, has to go out the door. So, you have to really think about this as a speculative asset. And the two key things that you need to think about when you do that is first your initial allocation. That’s the first step in mitigating risk is, how much would I be willing to risk without impairing my ability to meet my financial objectives? That’s for the individual investor to determine. And then how do I manage risk on an ongoing basis?
The price of bitcoin may just boil down to what someone will pay for it. That depends on what’s happening in the world and in the world of crypto. There’s a strong speculative undercurrent to bitcoin and cryptocurrencies in general. If everyone thinks the price should go up, it tends to go up.
The opening of bitcoin-related ETPs may be fueling some of this speculation. But it also gives the common investor easier access to a previously hard-to-access asset that may boost the return potential of a traditional stock and bond portfolio.
But I think that for the average investor, this sort of packaging, it’s important. Cryptos, otherwise, they’re quite challenging to access in a way that is secure, reliable, compliant, and to do this in a way that’s cost-effective. So, cryptos wrapped in an ETF, they really offer a meaningfully easier way for the average investor, the average client, who wants bitcoin exposure to be able to access this space. Whereas those sorts of previous offerings, they required more paperwork and oftentimes partnering with crypto-specialized firms and services that really offered a host of complications and added costs. So, I think that this wrapper, this packaging, of the ETF is attractive because it’s more familiar and it’s easier to work with at the end of the day.
One of the things that asset managers have done throughout history is provided access to difficult-to-access assets. So, the whole notion of pooling investments, that was asset managers actually started those things and it made life a lot easier for investors to get access to diversified pools of assets.
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Important information
NA3620424
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The Fund is speculative and involves a high degree of risk. An investor may lose all or substantially all of an investment in the Fund.
The Fund is not a mutual fund or any other type of Investment Company within the meaning of the Investment Company Act of 1940, as amended, and is not subject to regulation thereunder.
Shares in the Fund are not FDIC insured, may lose value and have no bank guarantee.
This material must be accompanied or preceded by a prospectus. Please read the prospectus carefully before investing.
The Fund currently intends to effect creations and redemptions principally for cash, rather than principally in-kind because of the nature of the Fund's investments. As such, investments in the Fund may be less tax efficient than investments in ETFs that create and redeem in-kind.
Bitcoin has historically exhibited high price volatility relative to more traditional asset classes, which may be due to speculation regarding potential future appreciation in value. The value of the Trust’s investments in bitcoin could decline rapidly, including to zero.
The further development and acceptance of the Bitcoin network, which is part of a new and rapidly changing industry, is subject to a variety of factors that are difficult to evaluate. The slowing, stopping or reversing of the development or acceptance of the network may adversely affect the price of bitcoin and therefore an investment in the Shares.
Currently, there is relatively limited use of bitcoin in the retail and commercial marketplace in comparison to relatively extensive use as a store of value, contributing to price volatility that could adversely affect an investment in the Shares.
Regulatory changes or actions may alter the nature of an investment in bitcoin or restrict the use of bitcoin or the operations of the Bitcoin network or venues on which bitcoin trades. For example, it may become difficult or illegal to acquire, hold, sell or use bitcoin in one or more countries, which could adversely impact the price of bitcoin.
The Trust’s returns will not match the performance of bitcoin because the Trust incurs the Sponsor Fee and may incur other expenses.
The Market Price of shares may reflect a discount or premium to NAV.
The price of bitcoin may be impacted by the behaviour of a small number of influential individuals or companies.
Bitcoin faces scaling obstacles that can lead to high fees or slow transaction settlement times, and attempts to increase the volume of transactions may not be effective.
Miners could act in collusion to raise transaction fees, which may affect the usage of the Bitcoin network.
Competition from central bank digital currencies (“CDBCs”) and other digital assets could adversely affect the value of bitcoin and other digital assets.
Prices of bitcoin may be affected due to stablecoins, the activities of stablecoin users and their regulatory treatment.
The open-source structure of the Bitcoin network protocol means that certain core developers and other contributors may not be directly compensated for their contributions in maintaining and developing the Bitcoin network protocol. A failure to properly monitor and upgrade the Bitcoin network protocol could damage the network.
Lack of clarity in the corporate governance of bitcoin may lead to ineffective decision-making that slow development or prevents the Bitcoin network from overcoming important obstacles.
If the award of new bitcoin for solving blocks and transaction fees for recording transactions are not sufficiently high to incentivize miners, miners may reduce or cease processing power to solve blocks which could lead to confirmations on the Bitcoin blockchain being temporarily slowed. Significant delays in transaction confirmations could result in a loss of confidence in the Bitcoin network, which could adversely affect an investment in the Shares.
A temporary or permanent “fork” in the blockchain network could adversely affect an investment in the Shares.
Flaws in the source code of Bitcoin, or flaws in the underlying cryptography, could leave the Bitcoin network vulnerable to a multitude of attack vectors.
A disruption of the internet may affect the use of bitcoin and subsequently the value of the Shares.
Risks of over or under regulation in the digital asset ecosystem could stifle innovation, which could adversely impact the value of the Shares.
Shareholders do not have the protections associated with ownership of Shares in an investment company registered under the Investment Company Act of 1940 (the “1940 Act”) or the protections afforded by the Commodity Exchange Act (the “CEA”).
Future regulations may require the Trust and the Sponsor to become registered, which may cause the Trust to liquidate.
The tax treatment of bitcoin and other digital assets is uncertain and may be adverse, which could adversely affect the value of an investment in the Shares.
Intellectual property rights claims may adversely affect the operation of the Bitcoin network.
The venues through which bitcoin trades are relatively new and may be more exposed to operations problems or failure than trading venues for other assets.
Ownership of bitcoin is pseudonymous, and the supply of accessible bitcoin is unknown. Entities with substantial holdings in bitcoin may engage in large-scale sales or distributions, either on nonmarket terms or in the ordinary course, which could result in a reduction in in the price of bitcoin.
The Trust is subject to the risks due to its concentration in a single asset.
Bitcoin spot trading venues are not subject to the same regulatory oversight as traditional equity exchanges.
Bitcoin transactions are irrevocable and stolen or incorrectly transferred bitcoin may be irretrievable. As a result, any incorrectly executed bitcoin transactions could adversely affect an investment in the Trust.
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