Is there investment value in Bitcoin?

After recent losses, are cryptocurrencies a good idea for institutional investors?

Is there investment value in Bitcoin?

Canadian pension plans have dabbled in Bitcoin but, thus far, this ‘asset class’ has failed to meet expectations. It begs the question, is there really any investment value in Bitcoin?

On June 15, asset manager BlackRock filed for a bitcoin exchange-traded fund (ETF) that would allow investors to get exposure to the cryptocurrency, just as the asset class comes under intense regulatory scrutiny, reports Reuters. BlackRock filed with the US Securities and Exchange Commission (SEC), but the US regulator has yet to approve any applications for spot bitcoin ETFs.

BlackRock isn’t the first organization to try and invest in cryptocurrency as an asset class. In Canada, Quebec-based pension fund Caisse de Depot et Placement du Quebec said that it wrote off almost $200 million bet on Celsius Network in 2022. Charles Emond, the fund’s chief executive officer, said Caisse de Depot invested in the sector too soon.

Also in 2022, Ontario Teachers' Pension Plan said it had to write down the entirety of its $126 million investment in FTX. The investment, made through Teachers’ Venture Growth (TVG) platform, was alongside a number of global investors so the plan could gain small-scale exposure to an “emerging area in the financial technology sector,” Teachers’ said in a statement. “Our investment represented less than 0.05% of our total net assets and equated to ownership of 0.4% and 0.5% of FTX International and FTX.US, respectively.

“The financial loss from this investment will have limited impact on the plan, given its size relative to our total net assets and our strong financial position. However, we are disappointed with the outcome of this investment, take all losses seriously, and will use this experience to further strengthen our approach.”

Even Canadian Pension Plan Investments (CPP) looked at cryptocurrency as an area to invest. However, after doing research, it stopped any consideration of investment in the asset class.

The government has gotten involved and announced in its Budget 2023 that it will require federally regulated pension funds to disclose their crypto-asset exposures to Office of the Superintendent of Financial Institutions (OSFI). It will work with provinces and territories to discuss crypto-asset or related activities disclosures by Canada's largest pension plans so Canadians are aware of their pension plans’ potential exposure to crypto-assets.

Exposure to cryptocurrencies

BlackRock’s bitcoin ETF would grant investors exposure into the crypto space, even as the sector faces steep regulation from the SEC.

“I see a big effort right now, among institutions including the SEC and BlackRock, to get an institutional imprimatur on Bitcoin and essentially institutionalize it,” says Richard Smith, chairman and executive director of The Foundation for the Study of Cycles (FSC), a research institution dedicated to uncovering the cyclical nature of markets and other phenomena, and co-founder of the investing tool Finiac, a risk analytics platform for independent investors. Smith, however, is not sure if investing in Bitcoin is a good idea for institutional investors.

Richard Smith

“To me, the biggest concern is, what does Bitcoin do for anyone at this point, other than provide the ability to have transactions and generate transaction costs? Where is the value coming from? What's going to make the value go up? Is it creating? What services is it providing?

“We're 12 years into this experiment at this point. And I have to say, personally, I don't see a lot of value creation. I see a lot of transaction generation and a lot of fees. I think that's partly why institutions want to get involved in it. Exchanges, transactions, and fees are big business. But, it has to ultimately create value.”

Smith believes Bitcoin and the blockchain have the potential to create value in terms of data and privacy when it comes to digital assets. But, for now, the attraction is likely due to the fact that Bitcoin has gone up a lot and investors could profit from it.

“Right now, Bitcoin is novel and interesting. I think there will be sustained interest in it. But there has to be a lot more than just that. Its volatility is just not going to be attractive to institutions in the long run.”

For institutional investors considering investing in Bitcoin, he suggests they ask the questions, what is Bitcoin? What value is Bitcoin going to create for our world and economy? “If you can’t answer these questions, you should not invest in it.”