The ETF will enable investors to gain exposure to Bitcoin through a standard brokerage account without having to hold the coins directly. This marks a step toward mainstream acceptability for the digital asset, which is up by close to 100% over the past six months.
But while we see potential for the technologies underpinning digital assets, we continue to view the coins themselves as speculative:
1. Crypto regulatory risks have not gone away and are difficult to price in. While the SEC has not objected to the launch of an ETF based on futures contracts, the commission’s chair Gary Gensler has adopted a skeptical tone on cryptos. In September, he likened stablecoins, which are pegged to conventional currencies, to casino chips. More broadly he added that cryptos could not avoid regulatory oversight. “This crypto space is now certainly of a size that without those investor protections of banking, insurance[and] securities laws [and] market oversight, I do think somebody is going to get hurt,” he said. “A lot of people are likely to get hurt.” This week the US Treasury Department also warned that digital currencies pose a risk to the effectiveness of economic sanctions as a tool of US foreign policy, according to a Reuters report. And such skepticism among governments and regulators is widespread globally. Last month China strengthened its ban on both crypto transactions and mining. In the UK, Bank of England deputy governor Jon Cunliffe recently raised concerns about the growing financial stability risks from crypto coins and tokens, suggesting more regulation is required, in addition to legislation protecting investors from financial crime and market integrity.
2. Coins and tokens are volatile and of questionable value as a portfolio risk hedge. Part of the reason regulatory headlines influence prices so heavily is that crypto prices are not anchored to credible fair value estimates or fundamentals. In addition, correlations are high between crypto coins and tokens, making diversification challenging for those directly exposed. We do not think investors should build strategic exposure to them within the context of a financial portfolio.
3. Central banks are on track to establish digital currencies of their own. In one form or another, digital cash is the future. China’s latest crackdown comes as it pushes on with its pilot e-yuan project. We believe the rapid rise in digital asset adoption will push more policymakers to roll out central bank digital currencies. In time, these could lead to more efficient and direct transmission of monetary policy, lower financial transaction friction, and smoother cross-border payments. Mainstream adoption could pave the way for smart contracts and other innovations, which PWC estimates could help unlock as much as USD 1tr in global GDP this decade.
So, while we see growth opportunities in the technology underlying digital assets, we view direct exposure in crypto coins and tokens as suitable only for highly risk tolerant and speculative investors. There are several more accessible approaches to distributed ledger technology (DLT), including through enablers and service providers who will build the infrastructure, and platform companies that can leverage DLT within their industry. Investors interested in speculative tokens or coins might instead consider alternative investments which might be more investable or attractive on a risk-adjusted basis. Read more on investing in long-term themes here.
Main contributors - Mark Haefele, Christopher Swann, Jon Gordon, Michael Bolliger, Andrew Thompson
Content is a product of the Chief Investment Office (CIO).
Original report - Bitcoin rally doesn’t dispel crypto concerns, 19 October 2021.
UBS Financial Services Inc. does not conduct any business within the digital asset space.