Have fund managers changed their tune on crypto?

It was the news bitcoin fans had waited more than a decade for. Finally, investment firms in America are permitted to manage exchange-traded funds (ETFs) that track the price of bitcoin directly, giving their customers easy access to the world’s most-important cryptocurrency.  

Regulatory approval, from the US Securities and Exchange Commission (SEC), of “spot” bitcoin ETFs  that own underlying bitcoins rather than using financial contracts to replicate the cryptocurrency’s price moves, was touted as huge milestone for crypto and set to launch it into the mainstream. 

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There are already 14 bitcoin ETFs in the US, with $1 billion (£800 million) added to bitcoin ETFs following the news, with BlackRock and Fidelity seeing the most inflows.  

However, the bitcoin price has fallen around 15% since the news, and the Financial Conduct Authority (FCA) in the UK still bans ETFs that track the price of cryptocurrency. 

It maintains this ban because it considers these products to be ill-suited for retail consumers due to the “harm they pose”.  

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The FCA says that crypto cannot be reliably valued, there are extreme price movements, inadequate understanding of crypto assets by retail consumers and lack of legitimate investment need for consumers to invest in these products. 

But will the regulatory shift in America lead to more mainstream adoption, and therefore a higher bitcoin price with its inclusion in more portfolios? 

Are you going to see bitcoin in your multi-asset fund?  

The answer is not yet, according to Legal & General Investment Management, the UK’s largest investment manager by assets.  

Simon Bell, in its asset allocation team, says that while SEC approval is likely to lead to further speculation that cryptocurrencies are here to stay and that they have a place in the global financial system, they should not be in investors’ portfolios.  

“We do not see a need for additional currencies and do not think the supposed benefits of cryptocurrencies hold up to scrutiny,” he said.  

Bell says that one issue with cryptocurrencies is that there are “significant drawbacks” as a means of payment and there is a trade-off between security and speed.  

He said: “At the secure end, where bitcoin sits, the cost is high energy consumption and a slow pace of transaction verification. As competition grows to verify transactions and win the reward, ever greater processor capacity is required, further increasing the energy use. 

“At the other end of the spectrum, speed comes at the cost of lower security: something that is unlikely to appeal in a global payment system.” 

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Another sceptic is Nathan Sweeney, chief investment officer of multi-asset at fund group Marlborough. He says that bitcoin’s role in a portfolio is still uncertain.  

He says: “We believe that the first question that needs resolving is how investors define bitcoin and the role they would intend it to perform in a portfolio. Is it a currency, is it a replacement for cash or gold, or is it a digitally encrypted payment software?” 

On the other hand, he says that bitcoin does act as a diversifier in portfolios in a “literal sense,” because it behaves so differently to other asset classes.  

“However, the volatility of bitcoin is extreme, and we certainly don’t have any current plans to introduce direct exposure into our portfolios,” Sweeney concludes.  

For the fund manager, the more sensible approach is to invest in companies providing “picks and shovels” for the cryptocurrency gold rush. So, for example, the businesses that are providing the blockchain technology that underpins cryptocurrencies and could have a huge range of other important applications, he says.  

Jamie Dimon, chief executive of JP Morgan, has also expressed doubts about the viability of bitcoin as an investment. 
Speaking to news channel CNBC, he said his “personal advice” was to not get involved.  

He said: “Blockchain is real. It is a technology. Cryptocurrencies have two types: those that might do something, such as with a smart contract...and ones that do nothing, like bitcoin.” 

What about blockchain?  

Blockchain is the technology that underpins the secure peer-to-peer transaction network of Bitcoin, like an online ledger.  

Bell says that the technology itself could be useful. He notes: “We have already witnessed successful bond launches on blockchains in the past couple of years, leading to faster verification and settlement processes and reducing the risk of failed settlements. These enhancements are likely to be beneficial in a myriad of other applications.”  

He adds that the shortcomings of the technology do not negate its usefulness, but merely steer its application.  

“For mainstream use, we think the vast quantities of data in scope would require multiple blockchains, each specialising on a specific function. There would be a need for both private and public blockchains,” he said.  

He reckons that the growing popularity of the technology will spur on central banks to develop their own digital currencies, which would then serve as the medium of exchange. 

How to invest in crypto in the UK 

While UK investors cannot buy bitcoin ETFs, they can own funds or shares whose fortunes are tied to cryptocurrency prices and the adoption of blockchain technology.  

They include Grayscale Future of Finance ETF and Han ETF Digital Assets & Blockchain. 

These trackers own companies such as Coinbase, PayPal and Robinhood, all of which allow customers to buy and sell cryptocurrency.