Bitcoin: scepticism and perplexity after ETF approval

The approval of Bitcoin Exchange Traded Funds (ETFs) by the Securities and Exchange Commission (SEC) in the US, was supposed to be a pivotal moment for the digital asset class, instead it has led to a less enthusiastic reaction and raised significant doubts. We propose two in-depth analyses, by the daily newspaper Il Corriere del Ticino and the weekly magazine The Economist, with Francesco Franzoni, Professor of Finance at USI and Senior Chair at the Swiss Finance Institute.

On the first day of trading in early January 2024, Bitcoin ETFs generated an impressive trading volume of over four billion dollars. Despite the approval of ETFs, a climate of uncertainty and criticism persists, especially when it comes to the potential risks for retail investors. The SEC had previously rejected these products due to concerns regarding investor protection. In this regard, SEC Chairman Gary Gensler emphasised that Bitcoin remains a "volatile asset" and urged investors to exercise caution.

In particular, as pointed out by Professor Francesco Franzoni, Professor of Finance at Università della Svizzera italiana (USI) and Senior Chair at the Swiss Finance Institute, "these ETFs are high-risk products for private (retail) investors because they are characterised by high volatility due to the speculative trend of the underlying asset, i.e. bitcoin. ETFs on equities or other financial instruments can also be speculative, but the underlying is, indeed, "real", and therefore, you know what to base your analysis on. With bitcoin, on the other hand, one can only rely on, or bet on, its adoption by other investors."

The recent launch of bitcoin ETFs and their current stock market performance reminds us of an earlier launch of thematic ETFs. Back in 2022, a research study conducted by Prof. Franzoni and his co-authors revealed that thematic ETFs, which aim to track a specific sector or trend, have underperformed broader ETFs by approximately 30% in the five years since their launch. This can be attributed to the fact that, at the time of launch, the focus around the trend theme is already widespread, and as a result, the underlying assets are already considered expensive.

Link to articles:

• Corriere del Ticino: https://www.cdt.ch/news/economia/bitcoin-i-fondi-etf-non-decollano-e-i-dubbi-sui-rischi-restano-341356
• The Economist: https://www.economist.com/finance-and-economics/2024/02/01/bitcoin-etfs-are-off-to-a-bad-start-will-things-improve
• Ben-David, I., F. Franzoni, B. Kim and R. Moussawi, Competition for Attention in the ETF Space, The Review of Financial Studies, 36, 3, March 2023, 987-1042, https://doi.org/10.1093/rfs/hhac048