Bitcoin ETFs miss the point

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Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.

The writer is a former investment banker and author of ‘Power Failure: The Rise and Fall of an American Icon’

The cryptoworld has been abuzz in recent weeks about the likelihood that the Securities and Exchange Commission will soon greenlight a bitcoin exchange-traded fund.

The idea that such an ETF will soon be offered to hungry, if misguided, US investors has helped provide a year-end kicker to the remarkable rally in bitcoin from the depths of its latest “winter” in late 2022. It became one of the best performing investments of 2023, rising around 160 per cent over the past year to nearly $44,000.

That is quite a turnaround given the crypto world has been on the ropes reputationally often during the past year or so. Not only has there been the bankruptcy of crypto exchange FTX and the criminal conviction of its founder Sam Bankman-Fried, but also its chief rival Binance agreeing to pay $4.3bn in penalties related to money laundering and breaching international sanctions. That was one of the largest corporate penalties in US history. Binance founder Changpeng Zhao also pleaded guilty to failing to protect against money laundering and resigned from his position.

But if you think about it, there has already been a way for investors to play the bitcoin rollercoaster for years: by buying, or selling, the stock of enterprise software company MicroStrategy which has hitched its fortunes to bitcoin, rendering its sales of enterprise software somewhat irrelevant to its stock market valuation.

Under a strategy driven by the company’s 58-year-old, MIT-educated executive chair Michael Saylor, MicroStrategy has been buying bitcoin since 2000. “Due to its limited supply, bitcoin offers the opportunity for appreciation in value if its adoption increases and has the potential to serve as a hedge against inflation in the long term,” it said at the time. MicroStrategy is thought to be the largest listed holder of bitcoin in the world. The company owns 189,150 bitcoins, purchased over the years at an aggregate price of around $5.9bn, as of the end of December.

MicroStrategy’s software operations have brought Saylor into the regulatory spotlight. In 2000, he agreed to pay $8.3mn plus a $350,000 penalty to settle SEC charges of materially overstating software revenues and earnings. But when bitcoin was riding high, say around November 2021, when its price hit $69,000, he drew a lot of attention. He even bedazzled Tucker Carlson for more than an hour about the wisdom of the cryptocurrency before the television anchor was defenestrated from Fox.

Saylor is a true believer, and an articulate one at that. His interviews about bitcoin are lengthy and spellbinding. He speaks in complete paragraphs. You come away from listening to him convinced that bitcoin is the next great innovation in the financial world. And then, you step back, give it a thought or two and remember that Jamie Dimon, CEO of JPMorgan, said of cryptocurrency, “If I was the government, I’d shut it down.”

Saylor relinquished the role of the CEO of MicroStrategy in August 2022 to become executive chair after yet another bitcoin plunge. At the time, the company had reported cumulative impairment losses of nearly $2bn on its digital assets since acquisition.

But thanks to the run-up in the price of bitcoin in 2023, MicroStrategy’s hoard is now worth more than $8bn, giving the company a gain of some $2bn on its investment. Not surprisingly, MicroStrategy’s stock price also outperformed in 2023, up more than 330 per cent for the year. Its market value of around $8.8bn means that investors are valuing its software business at around $800mn. (That is still hefty given MicroStrategy made a small pre-tax profit of around £13mn on revenues of $371mn in the nine months to September 30, after taking into account share-based pay but excluding impairments on its digital holdings.)

So MicroStrategy is essentially a play on bitcoin and has been for years. In other words, there’s been no need to wait for the SEC to approve a bitcoin ETF, it seems to me. Saylor himself told CNBC: “We’re kind of like your nonexistent spot ETF.”

The problem with bitcoin isn’t that there hasn’t been a way to speculate on it. The problem with bitcoin is that it’s all about speculation. We don’t need new ways to speculate on the cryptocurrency. What we need, if bitcoin is going to be the saviour its advocates want us to think it is, is a use for bitcoin.

When it can be used to buy and sell the things we want, as seamlessly as fiat currency, that’ll be the game changer. The real excitement for bitcoin won’t come from the SEC authorising new ways to speculate on it, but rather when there’s more to it than just speculation.