They may not be epochal, but they could spur innovation.
The global business press used words like “watershed,” “breakthrough,” and “new era“ to describe the long-awaited spot Bitcoin exchange-traded funds (ETFs) that debuted on major US trading exchanges on January 11.
Consider: The day began with BlackRock’s new entry—iShares Bitcoin Trust or IBIT—trading 10 million shares in the first 15 minutes after Nasdaq’s opening bell—and when the dust settled in late afternoon, some $3 billion had been traded across the 11 new funds on opening day alone.
In addition to BlackRock, the world’s largest asset manager, other issuers included Fidelity Investments, Franklin Templeton, and Grayscale Bitcoin Trust—the last of which scored the third-most heavily traded ETF debut on record, according to Bloomberg. The new ETFs are listed on the Nasdaq, NYSE, and CBOE exchanges.
They are widely expected to make it easier for individuals to invest in Bitcoin, the first and largest cryptocurrency, given that retail investors often lack the technical and custody skills to purchase cryptocurrencies on their own.
But what about institutional investors and large corporations? Are they also expected to participate in the coming crypto bonanza now that the US Securities & Exchange Commission (SEC) has lent its imprimatur—or at least not its open hostility—to a spot market Bitcoin ETF? Could corporate financial officers now consider Bitcoin a potential corporate treasury reserve asset, for instance?
In 2021, the SEC greenlighted Bitcoin futures ETFs backed by derivatives that traded on commodities exchanges like the Chicago Mercantile Exchange, but these didn’t attract mainstream investors.
Thus far, only a handful of large public corporations have substantially invested in Bitcoin: Tesla, Block (formerly Square) and most notably, MicroStrategy, which has a reported 174,500 Bitcoins in its corporate treasury that makes it by far the biggest public company that holds crypto.
More typically, corporate financial officers have favored short-dated US Treasuries, cash, commercial paper, and money market funds for their reserves—not high-risk assets like crypto.
Cautious Corporates
There are good reasons why institutional investors and corporates may not be changing their stripes anytime soon.
There is the problem of Bitcoin’s ongoing volatility, as the Europe-based division head of a leading business consultancy, who was not authorized to speak, told Global Finance. “So, the ETFs will be more used as an investment vehicle for asset managers than by CFOs.” Bitcoin’s price gyrations “make investing a bit more dangerous for many companies.”
“The vast majority of corporates will not take the MicroStrategy approach,” André Casterman, managing director of Casterman Advisory, says that CFOs will not move their treasury funds into crypto en masse soon.
There are other reasons beyond crypto’s price volatility. Most large public companies aren’t owned or controlled by disruptive, hard-charging individuals—like the triad of corporate treasury pioneers: Tesla’s Elon Musk, Block’s Jack Dorsey and MicroStrategy’s Michael Saylor, who can do as they like in this area. Pension fund managers, by comparison, answer to investment boards, while CFOs of publicly traded companies must be mindful of shareholders.
Thus, “the career risk for those in charge is just too great for them to dive in and allocate their treasury cash to Bitcoin instead of straight cash or USTs,” recently posted James Lavish, co-managing partner at the Bitcoin Opportunity Fund.
Still, companies like BlackRock and Fidelity do extensive due diligence before applying for an ETF, assessing security issues and gauging customer demand. In a sense, they have already vetted Bitcoin and bestowed their seal of approval upon it. At the least, they provide some assurance for corporate CFOs who may have been sitting on the fence about Bitcoin and other cryptocurrencies.
The treasury assets diversification argument is complex, however, because there is a strong belief that public companies should focus on their core business operation, “suggesting that investing in Bitcoin may not align with their core business objective,” noted Jim Kyung-Soo Liew, associate professor of finance at Johns Hopkins University’s Carey Business School.
Liew continued, “considering the accessibility of Bitcoin through ETFs, it’s evident that the career risk for CFOs has now substantially diminished.”
There could also be a sort of ‘virtuous cycle’ process at play here, at least regarding volatility. The argument is that as more corporations and institutional investors invest in BTC, Bitcoin becomes less volatile because these groups tend to be long-term investors. This, in turn, brings in more institutional investors, and so on.
“Nevertheless, in a competitive environment where peer companies are actively and aggressively venturing into Bitcoin, FOMO [fear of missing out] could kick in and exert significant pressure on corporate CFOs’ decisions to include Bitcoin,” said Liew.
Others agree that this week’s events could spur large institutions to invest in cryptocurrency. “A spot Bitcoin ETF could inspire some institutions who were on the fence to incorporate digital assets into their portfolios,” Lim Wee Kian, CEO of DBS Digital Exchange, told Global Finance.
However, Lim adds that an ETF alone is just one piece of the puzzle before cryptocurrencies achieve widespread adoption by corporates. “Equally as important is the proliferation of institutional-grade platforms that offer investors peace of mind regarding how the ETF’s underlying asset is held,” said Lim.
Regarding a potential corporate allocation of Bitcoin, “There are some models which suggest 4-6% portfolio ratio is optimal,” the consulting firm executive (cited above) continued. “Potentially, some CFOs will go that way. But to do so, they must first invest in skilled people who understand this market and the volatility. This is quite different from the bond, FX or equity markets.”
In sum, the SEC’s approval of 11 Bitcoin ETFs isn’t likely to overturn the traditional financial and corporate communities any time soon. Still, it can become the basis for a new round of financial innovation. Or, as Casterman told Global Finance, at a minimum, “it’s a great opportunity for asset managers to create new products.”
