Are Gold ETFs a Blueprint For Bitcoin ETFs?

The introduction of bitcoin ETFs is important to advance the Bitcoin ecosystem. Financial experts often point to gold, whose ecosystem exploded after capital made its way into the industry. Bitcoin has aspirations to become a similar store of value, a digital gold so to speak.

But the precious metal has had a head start on its digital counterpart. It has been traded for several centuries and was considered as reserve currency for most of that time. Within the current investing context, it acts as a hedge against the market’s volatility. Funds flowed into gold in the aftermath of the financial crisis.

In contrast bitcoin is less than a decade old and has yet to become a valued asset class.

Will Bitcoin ETFs Follow Gold’s ETF Performance?

Here is a bit of history on the context and performance of gold ETFs.

There are several parallels between gold and bitcoin. Much like bitcoin is currently, gold was difficult to store or purchase for average investors. In fact, before the first gold ETFs were introduced, the only way to buy gold was in coins or bars. Regulation for gold was still steeped in history. For example, there was much debate about the applicability of the Howey test to gold’s status as a security. This was partly because there was no historical precedent to fall back on.

The first gold ETF was launched in March 2003 in Australia by ETF Securities. But it wasn’t until the launch of SPDR Gold in 2004 that gold ETFs took off. SPDR Gold began trading at a particularly miserable time in gold’s history. Gold markets were drying up as government central banks sold their holdings and withdrew from the market.

SPDR began trading at a price of $44. According to reports, buyers thronged to the ETF and bought $1 billion worth of shares within the first three days of trading. The launch of exchange-traded funds for gold increased its prices during the initial years and provided it with the necessary fuel, when it skyrocketed during the financial crisis of 2008.

Gold ETFs had a net asset value (NAV) of $332 at launch. By the end of 2003, the first year of gold ETF trading, the number of assets under management was $191,000, according to ETF securities data. On its tenth anniversary in 2013, SPDR Gold Trust alone had $27 billion in assets, down from a peak of $50 billion in 2011.

According to the World Gold Council, investment demand for gold has increased at an average rate of 18% per year since 2001. “This has been driven in part by the advent of new ways to access the market, such as physical gold-backed exchange-traded funds (ETFs),” the Council writes.

Will There Be Problems For Bitcoin ETFs?

If bitcoin ETFs mimic the performance of gold ETFs, then their problems may also resemble those in gold’s ecosystem. To that extent, it is interesting to know that gold ETFs sway prices in futures market. This is not the case in cryptocurrency markets, where spot prices determine futures prices. To be sure, this is largely due to the low trading volume for bitcoin futures. That is expected to change in the near future, with the introduction of 1-day physically delivered bitcoin futures contracts.

Gold futures also have an indirect effect on miners. Because they set spot prices for the precious metal, gold futures also determine the supply side economics for miners. For example, a high price for gold results in increased mining activity while a low price can decrease the number of miners available in the market.

Interestingly, while industrial gold mining operations cut back on their operations due to a contraction in profits, the effect on artisanal miners is milder. This is mainly because their profit margins are higher due to a variable labor cost.

Bitcoin also has a mix of industrial and individual mining operations. Bitmain, the world’s biggest bitcoin mining company, experienced a surge in profits and product sales during last year’s price run up. This year’s pullback has not affected its operations. But the effect of lower prices on small bitcoin mining outfits and individual miners has not yet been quantified.

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