[OPINION]SEC allows bitcoin ETFs but bitcoin still lacks intrinsic value

Bitcoin and other cryptocurrencies are like no other security.

Monday, January 22nd 2024, 8:25AM

by Jenny Ruth

Whether cryptocurrencies are even securities is currently being battled over in a US federal court in Manhattan.

On one side, the US Securities and Exchange Commission (SEC) is arguing that they are securities and that therefore the cryptocurrency exchange platform Coinbase is breaking the law by selling unregistered securities.

On the other side, Coinbase's lawyer, William Savitt, is saying digital coins aren't securities and are more like Beanie Babies and other collectibles than stakes in a company.

“It’s the difference between buying Beanie Babies Inc and buying Beanie Babies,” Savitt told the court.

Shares – equity – in a company and a company's bonds – debt – are both definitely securities and so are units in the exchange-traded funds (ETFs) based on bitcoin. Earlier this month, the SEC greenlit 11 firms to create such ETFs.
So too are derivatives, such as futures and options contracts, securities and the markets for all these securities are highly regulated around the world.

By contrast, cryptocurrency markets are unregulated and operate more like the wild west days of the New Zealand stock market, and likely even more so, before it too became regulated.

Cryptocurrency markets are notorious for both fraud and manipulation and operators of two of the largest cryptocurrency exchanges were successfully prosecuted late last year.

FTX founder Sam Bankman-Fried was found guilty in October of seven criminal fraud-related charges and is in prison awaiting sentencing in March. He could face up to 115 years in jail.

And Binance founder Changpeng Zhao pleaded guilty in November to violating federal money-laundering rules and will be sentenced in February. He faces up to 18 months in jail.

The SEC's approval of the ETFs came more than a decade after financial firms started angling for its approval.

It was grudgingly given and only because the SEC lost a key legal battle in October last year.

The DC Circuit Court of Appeals ruled that SEC's refusal to allow Grayscale Investments, a digital currency asset management company, to convert its about US$17 billion Grayscale Bitcoin Trust into an ETF was “arbitrary and capricious."

And the vote at the SEC was three-to-two with even chair Gary Gensler, who voted in favour, noting the decision doesn't mean endorsement of bitcoin.

“We did not approve or endorse bitcoin. Investors should remain cautious about the myriad risks associated with bitcoin and products whose value is tied to crypto,” Gensler said in announcing the decision.

Indeed, one of the SEC dissenters, Caroline Crenshaw noted the prevalence of wash trading, a practice in which traders create the appearance of high trading interest by both buying and selling the same products at the same time, often driving up prices, and then selling to unwitting third parties.

Crenshaw cited one analysis of 29 cryptro exchanges which found wash trading accounted for as much as 77.5% of activity.

With “real” or fiat currencies, those backed by the governments of different countries, the power of each government's ability to tax plus the rule of law and regulation of banks and other traders is what gives them legitimacy.

When Bitcoin's reputed founder, Satoshi Nakamoto, launched the blockchain technology-based cryptocurrency in 2009, his vision was that it would become a means of people paying each other without the need for a bank or other intermediary.

In practice, it hasn't worked like that and it is much more an avenue of speculation, with its value being only what someone else is prepared to pay.

Unlike companies, it has no cashflows or earnings or any intrinsic value – the famous tulip bubble of the 1630s at least involved flowers.

Cryptocurrency is often compared to gold and described as a store of value.

True, gold bars have no cashflows, but gold at least has industrial uses and can be made into jewellery, whereas bitcom is just an item in a computer.

El Salvador became the only country to afford bitcoin legal tender status in 2021 but it hasn't been used much for buying and selling.

Its former president, Nayib Bukele, spent more than US$120 million of his impoverished nation's reserves on bying bitcoin but that investment then went severely into the red as the price of bitcoin plummeted from a record near US$69,000 in July 2021 to as low as about US$16,500 in early 2023.

Thankfully for El Salvador, the price has since recovered on speculation about the SEC finally approving the ETFs and is currently trading at about US$40.881.

Local bitcoin afficionado, Koura Wealth managing director Rupert Carlyon, whose firm offers its KiwiSaver clients the option of investing in a bitcoin fund among the nine funds it runs, argues that the main reason for El Salvador making bitcoin legal tender was to facilitate remitances.

Something like 30% of the country's GDP comes from remitances from people working in the US who paid between 6% and 10% to banks to facilite transfers home, he says.

Carlyon argues that because the 11 firms SEC greenlit include global heavyweights such as Blackrock and Fidelity, this will add some much-needed legitimacy to the cryptocurrency market and, over time, aid in making its price much less volatile.

In the meantime, Koura recommends those of its customers who want to dabble in the market to allocate no more than 3% of their portfolios to bitcoin and has a maximum allowable cap of 10%.

In the two years since Koura began offering the option, its investors will have done rather well – in the two years ended Jan 14, bitcoin has gained 16.6% compared with the benchmark S&P/NZX 50 Index shedding 5.4%.

But Carlyon agrees with me that before bitcoin could ever gain widespread use for buying and selling real assets its price would have to be far less volatile.

But I'd certainly advise caution for anybody wanting to dabble in bitcoin - some years ago, I likened cryptocurrency to the emperor's new clothes because of its lack of intrinsic value. I see no reason yet to change that view.

Tags: bitcoin