by Zain Jaffer
Sometimes a major strategic shift happens in the world which makes conventional wisdom obsolete, or at least open to question. One of those major shifts is on the way Bitcoin adoption in fund and corporate balance sheets has started to accelerate, especially with the introduction of its Exchange Traded Fund (ETF).
One of the major holdouts against Bitcoin has been The Vanguard Group, the huge investment group founded by investing legend John Bogle. Currently Vanguard has around $8.6 trillion assets under management (AUM). After the introduction of the spot Bitcoin ETFs in January 2024, Vanguard CEO Tim Buckley announced that they would never include Bitcoin and other cryptos in their funds. Recently Buckley was replaced by former Blackrock executive Salim Ramji, who led its ETF efforts. This has led to speculation as of the time this oped was written that Ramji will lead Vanguard into the Bitcoin age.
Although JP Morgan CEO Jaime Dimon, who is still with the Company, has said repeatedly that he does not believe in Bitcoin, the bank’s recent 2024 SEC filings indicate it does hold Bitcoin spot ETFs. Other major banks and institutions like Wells Fargo, BNY Mellon, and Europe’s BNP Paribas recently indicated that they also hold spot Bitcoin ETFs. The Wisconsin Investment Board pension fund also announced that they hold more than $100M worth of spot Bitcoin ETFs.
As major institutional holders acquire spot Bitcoin ETFs, the volatility (Beta) is expected to decrease as compared to the early days when it was mostly retail investors who held it. The gain over the S&P and other markets (the investment alpha) is also expected to decrease over time, but technically it has just been a few months since its introduction last January 2024, so exponential growth is still in the cards, particularly since the supply of Bitcoin is fixed.
The SEC approved the spot Bitcoin ETFs but insisted that each one had a separate custodian and surveillance partner. The NASDAQ and CBOE are two of the surveillance partners, and Coinbase is one of the custodians used by the ETF issuers. This system of multiple counter parties involved was designed to reduce the possibility of collusion and market manipulation.
Interest in these Bitcoin spot ETFs has also been fueled by growing fears that global debt, particularly that of the US, Japan, China, and other major economies, are running out of control. At present, the US issues debt to pay for debt, hence interest payments are now larger than its defense, Social Security, and Medicare spending.
Since Washington does not seem to indicate that it is now prepared to cut back on spending, potential future US treasury buyers are starting to become reluctant, since the US is paying its debt by issuing more debt. The Federal Reserve, on its mandate of reducing inflation, has hiked interest rates by greater than 500 basis points since 2022 to make debt more expensive and slow down the US economy. But it also had the effect of increasing the interest that the US needs to pay its bond lenders, now at around 5% yield on the ten year treasury bond.
All of this is weighing on sovereign wealth, hedge funds, pension funds, banks, and even regular investors, who are afraid of a possible default risk. This is further exacerbated by fears in the commercial real estate (CRE) sector, particularly in office space, because of high vacancy rates caused by Work from Home, Artificial Intelligence (AI), and a possible rocky economic outlook. CRE is a major component of many investor portfolios, balance sheets, and holdings.
Bitcoin and crypto digital assets are still considered very risk-on assets by many people, companies, and funds. But with the introduction of these spot Bitcoin ETFs by Wall Street giants monitored closely by the regulators, it looks like major growth is the outlook ahead.