The cryptocurrency market is booming again. This time, institutional demand is pushing prices higher. But some investors still have to overcome hurdles to invest. Because:
- On the retail side, trading and secure storage of cryptocurrencies require expertise. Such as the preparation and management of secure cold (offline) wallets. Riskless storing and handling are complicated.
- On the institutional side, investment rules do not allow investors to buy assets in an unregulated market. Cryptocurrencies are still unregulated in most countries.
Two Factors Are Undermining the Inflation Hedge Narrative
So, securitized cryptocurrencies, such as exchange-traded products, may play a major role in the future. Exchange-traded funds (ETFs), notes (ETNs), and certificates may be available to some institutional players and small investors already. This is why many investors are waiting for cryptocurrency ETFs to be finally allowed. That has not yet happened in the USA but in Canada. And in Europe, dozens of ETNs and certificates are available on the stock exchanges.
Cryptocurrencies, in the first place, bitcoin are considered by their supporters as an inflation hedge, because the amount of bitcoins is limited (by 21 million). The narrative is, it was the new “digital gold”. But there two factors undermine this protection. One is the inflation rate of bitcoin and the other is the high cost of securitized cryptocurrency products.
Bitcoin Inflation Higher Than US CPI
However, bitcoin has also a considerable “inflation rate” of approximately 1.76 percent p. a. In the next 12 months. (The use of the term “inflation” may be confusing in this case, but it is widely used.) It is the rate by which the number of bitcoins in circulation will increase. The calculation is simple. We divide the estimated number of bitcoins produced in the next year by the number of all bitcoins in circulation today.
- Circulating Supply: 18,634,581 BTC (February 21, 2021)
- New Blocks: appr. every 10 minutes
- New Bitcoins per Block: 6.25 coins
- New Bitcoins per Hour: 37.5 coins
- New Bitcoins per Day: 900 coins
- New Bitcoins per Year: around 328,500 coins
- Inflation Rate: 328,500/18,634,581 BTC=0.017 629, circa 1.76 percent p. a.
The annual inflation rate (CPI) in the USA was steady in January, at 1.4% p. a., less than the estimated 12M supply change of bitcoin. But another big difference is, bitcoin’s inflation will decrease significantly in 3-3.5 years. But U.S. inflation expectations have risen a lot recently, and there is no limit to the devaluation of fiat money. The rules of bitcoin, on the other hand, are firmly programmed into the system. We can say that they are engraved in stone.
Bitcoin and Cryptocurrency ETPs Are Expensive
If you buy bitcoin through an ETF, ETN, or other similar product, your wealth will also decrease automatically by the management fees. Unfortunately, these securitized crypto-products are expensive today, compared, for example, with other exchange-traded products tracking gold or silver. For example, the “gross expense ratio” of the SPDR Gold Shares (GLD) ETF was 0.4% p. a., and the “sponsor fee” of iShares Silver Trust (SLV), 0.50%.
Management fees of cryptocurrency products
|Purpose Investments||Purpose Bitcoin ETF||BTCC.B, BTCC.U||Canada||1.00%|
|3iQ||Bitcoin Exchange Traded Fund||QBTC, QBTCu||Canada||1.95%|
|3iQ||Ethereum Exchange Traded Fund||QETH, QETHu||Canada||1.95%|
|CI Global, Galaxy Digital Cap.||CI Galaxy Bitcoin Fund||BTCG.U, BTCG.UN||Canada||1.80%|
|Grayscale||Grayscale Bitcoin Trust||GBTC||USA||2.00%|
|Grayscale||Grayscale Ethereum Trust||ETHE||USA||2.50%|
|Grayscale||Grayscale Bitcoin Cash Trust||BCHG||USA||2.50%|
|Grayscale||Grayscale Ethereum Classic Trust||ETCG||USA||3.00%|
|Grayscale||Grayscale Litecoin Trust||LTCN||USA||2.50%|
|FiCAS AG||15 FiCAS Active Crypto ETP||BTCA||Europe||2.00%|
|ETC Issuance GmbH||BTCetc Bitcoin Exchange Traded Crypto||BTCE||Europe||2.00%|
|VanEck ETP AG||VanEck Vectors Bitcoin ETN||VBTC||Europe||2.00%|
|Coinshares Digital Sec. Ltd.||CoinShares Physical Bitcoin||BITC||Europe||0.98%|
|21Shares||21Shares Bitcoin ETP||ABTC||Europe||1.49%|
|21Shares||21Shares Ethereum ETP||AETH||Europe||2.50%|
|21Shares||21Shares Polkadot ETP||ADOT||Europe||2.50%|
|XBT Provider||Bitcoin Tracker One||COINXBT, COINXBTE||Europe||2.50%|
|XBT Provider||Ether Tracker One||COINETH, COINETHE||Europe||2.50%|
|Vontobel||Tracker Certificate linked to Bitcoin||VL3TBC||Europe||1.50%|
|Vontobel||Tracker Certificate linked to Ether||VF0ETH||Europe||1.50%|
|(Source: Home pages of issuers, product fact sheets)|
By my research, the crypto-ETPs on the market are charging 2.03 percent management fees on average. That is high, especially in today’s low-yield environment. Two percent on an annual basis may determine if your investment is successful or unsuccessful. But some issuers or asset managers charge only approximately one percent. Is the custody of bitcoin more expensive than the physical storage of precious metals? Or, the crypto-custodian market is still too small to operate effectively, at this time?
Who Cares a Few Percent Now in the Bitcoin Market?
Add the 1.76 percent inflation rate and the 2.03 percent in management fees, and your wealth will decrease automatically by 3.79 percent p. a. And then we didn’t even talk about the counterparty risks of exchange-listed products. But this looks very small compared to the extraordinary price gains that bitcoin and other crypto-assets have achieved in recent months. Most investors are hoping to multiply their capital, so a few percent a year doesn’t matter much now in the crypto-market. Maybe later, in a few years, if the market becomes less volatile.
Related posts on Ageless Finance Investing:
7 Ways to Buy Bitcoin and Ether in Europe (and 2 Horror Stories)
(Sources: Coinmarketcap.com, Bitcoinblockhalf.com, official home pages of ETP- and ETF- issuers, product fact sheets.)