Commentary: Bitcoin ETFs are a siren song, not proof of concept
THE GROWING BITCOIN BUBBLE
Democratisation of the market is a common characteristic of financial bubbles. The idea that the playing field has been levelled and everyone now gets access to an asset has historically been a siren’s song luring investors to participate in financial bubbles. Bitcoin ETFs seem to be this bubble’s bait.
They could even be an impediment to the US Federal Reserve’s inflation fighting. Bubbles are inherently inflationary because an economy diverts capital to bubble assets instead of to productive resources. Simply put, money flows to things the economy doesn’t need at the expense of things it does. If the resulting undersupply of goods and services can’t keep up with aggregate demand, or productivity doesn’t significantly improve, then a bubble’s misallocation of capital ignites inflationary pressures.
As evidence mounts that globalisation is starting to contract, the US is in a somewhat precarious position because of its massive trade deficit. One might therefore expect capital flows to shift towards improving the country’s woefully inadequate infrastructure and capital base. The advent of bitcoin ETFs could further sidetrack capital towards unproductive speculative use.
Some have suggested that bitcoin is a digital version of gold. That seems to ignore the fact that such precious metals and commodities have economic uses and aren’t merely a means of speculation or a store of value. The fillings in my mouth or my wedding ring won’t ever be made of bitcoin.
In fact, it better resembles digital tulips, echoing the Dutch tulip bubble of the 1600s. This craze got so extreme that the Amsterdam Stock Exchange began to regularly trade bulbs alongside equities. The cryptocurrency rage is now extreme enough that established exchanges including the NYSE and Nasdaq will start trading bitcoin ETFs. This will probably spur additional public interest, but for the wrong reasons.
Those looking to pile in should remember that bitcoin and other cryptocurrencies still seem a tool for speculation, rather than currencies with proven economic merit. The actions of last week will simply expand that speculation to a broader, and likely unsuspecting, audience.
Richard Bernstein is chief executive and chief investment officer of Richard Bernstein Advisors.
