Cryptocurrency market will be driven by traditional financial industry giants

Financial giants authorized to sell exchange-traded funds that invest directly in Bitcoin include Boston-based Fidelity Investments, as well as major companies such as BlackRock and VanEck. Fidelity’s investment platform, one of the largest in the world, allows you to: You can buy these ETFs alongside regular stocks and bonds.

Another investment giant, Franklin Templeton, on Thursday posted a photo of its Ben Franklin avatar featuring the “Laser Eyes” meme. The meme is typically used by crypto superfans on social media to decorate their profile pictures with a tongue-in-cheek, futuristic vibe.

Christian Catalini, founder of the MIT Institute for Cryptoeconomics, said: “This is a huge deal, but probably not for some of the reasons why people have been so excited about X and all the memes and jokes over the last few hours. No,” he said. “This is a very important step towards establishing Bitcoin as an important new asset class that traditional financial institutions can directly engage with.”

(Catalini is also the co-founder of Bitcoin payments company Lightspark.)

This may come as a surprise to those who have not paid attention to cryptocurrencies since the market collapse of the FTX exchange 14 months ago. Despite increasing regulatory and economic setbacks, cryptocurrencies were among the top performers in the market in 2023.

Bitcoin, the largest and most valuable cryptocurrency, soared 154 percent last year. Meanwhile, the Standard & Poor’s 500 index rose 24%, and the Nasdaq rose about 44%.

All of this was happening as former FTX CEO Sam Bankman Fried was tried and found guilty on charges of fraud in the company’s bankruptcy.

“It has been a very difficult experience to see this industry belief system come to life,” said Dave Balter, CEO of FlipSide Crypto. A Cambridge company specializing in cryptographic data analysis. “The ‘big deal’ on a personal level is spiritual, and infidels and rebels recognize why our beliefs have never wavered.”

However, despite the emergence of some big names in the crypto world, there are also some high-profile holdouts who are airing the same criticisms that have faced cryptocurrencies for years. doing. This means that Bitcoin and other cryptocurrencies have always been among the riskiest and most volatile investments, subject to unpredictable fluctuations in value.

Vanguard, the bastion of mediocre index funds, said it has no plans to offer a Bitcoin ETF through its brokerage, even as competitors rush to do so.

“It is our view that these products are inconsistent with our proposition, which focuses on asset classes such as stocks, bonds, and cash that Vanguard views as components of a balanced long-term investment portfolio.” said the company. Statement to the Wall Street Journal.

And lest anyone think that cryptocurrencies have lost their ability to unpleasantly surprise investors, the market took another big hit just days after the ETF approval that many boosters had been waiting for. By Sunday, Bitcoin’s price had fallen more than 10% from its midweek high as investors looked to lock in profits after recent gains.

That was just the first week of pain in Bitcoin’s relationship with traditional investment giants.

“It’s like communicating with the enemy,” said Ryan Shea, a crypto economist at London-based financial technology company Trakx. “But it’s important for moms and mothers to get to the next level in order to feel comfortable and gain legitimacy in this world.”

Traditionally, buying Bitcoin or other cryptocurrencies has been very different from trading more familiar investments. Investors often need to create an account at a cryptocurrency exchange such as Coinbase (although some brokerages do offer some cryptocurrency services). Additionally, for those who want maximum control over the security of their assets, there are several independent “crypto wallets” available for storage.

Compare that process to the relative ease of investing in these new Bitcoin ETFs, which can be bought and sold the same way you trade Microsoft or Nvidia stock. His ETFs for stocks and other investments have long been available to brokerage clients, but this is the first time one of these funds can actually hold Bitcoin.

Already, 11 SEC-approved funds are vying for new money on the market, which could mean lower costs for consumers in the short term. The companies compete on fees, which tend to be less than 0.5% of assets, and some, like ARK Investment Management, have temporarily waived fees altogether.

Bitcoin-related products previously on the market, such as derivatives-based funds and trusts, have fees as high as 2% to 3%.

“This is a land grab,” said Paul Karger, a wealth advisor and co-director of Twin Focus in Boston. “A few big winners are going to own most of the inflow assets on Main Street.”

Given their lower fees, these new funds are You can take a closer look at Bitcoin price movements. This is something its predecessor, which was primarily based on futures contracts and has been around for two years and has changed, was unable to do. This discrepancy, called “tracking error” in trade parlance, occurs when an ETF’s value deviates from its underlying asset.

Matthew Walsh of Castle Island Ventures, a blockchain investment firm in Boston, said Bitcoin futures ETFs have a “tracking error” that can reach 5% to 10%, while spot ETFs track cost and We expect there to be a one-to-one correlation. of Bitcoin. “This is a huge win for retail investors,” Walsh said.

Eric Biegeleisen, partner and deputy head of investments at ETF investment firm ThreeEdge, said the move brings Bitcoin one step closer to becoming a “legal” asset. He likes having his 11 funds to choose from, but now he’ll have to figure out which one he likes best. “Certainly there are concerns from the beginning,” he added. The main ones are fraud and asset security.

It will take a huge amount of education to reassure investors, said Ophelia Snyder, co-founder and president of financial firm 21Shares, which worked with ARK to create one of the new Bitcoin ETFs. . But early signs show there’s a lot of potential.

“I’ve never seen money like this in crypto. A billion dollars is a lot of money in one day, but I realized that in the first two hours. This is not the same ballgame anymore.”

Suchita Nayar can be reached at suchita.nayar@globe.com.