How Bitcoin ETFs Will Boost Crypto On Network Effect

Bitcoin is having its moment in the sun this week. Following U.S. Securities and Exchange Commission (SEC) approval, about a dozen new exchange traded funds (ETFs) started trading today (Thursday), giving mainstream investors access to the complicated and eccentric cryptocurrency market – without having to buy cryptocurrency.

This will drive mainstream adoption of the leading cryptocurrencies, help the market mature, and incentivize more development and use cases. It has also boosted the largest cryptocurrencies from 10-15% this week. It should also help cryptocurrencies boost their own powerful network effects, as they become more widely adopted.

The Grayscale Bitcoin Trust ETF (GBTC) is the largest of the new ETFs. It was converted from an over-the-counter trust that had more than $28 billion in assets. Other ETFs include the Invesco Galaxy Bitcoin ETF (BTCO), Wisdomtree Bitcoin ETF (BTCW), Ishares Bitcoin Trust (IBIT), and Fidelity Wise Origin Bitcoin Fund (FBTC). In early trading, GBTC and IBIT had the most volume in trading. Grandma (or grandson) can now trade crypto in their Schwab or Fidelity accounts.

This is a watershed moment that will accelerate adoption and development of cryptocurrency use and business models, rather than the reverse. The launch of the ETFs will also serve to bring hundreds of billions of dollars into the cryptocurrency market over a long period of time, just as the launch of the gold ETFs in 2004 democratized access to precious metals and drove a 4X-5X growth in the assets.

Crypto Bears are Stubborn!

Despite all this, cryptocurrency bears continue to attack digital currencies as a useless, speculative bubble that should be beaten down or banished forever.

It seems as if many of these so-called financial experts don't understand innovation, or network effect, the powerful pull of connecting people with new technology. This is the value of Metcalfe's Law. They also forget that cryptocurrency drives more automation and accountability into the financial system -- and provides an alternative to inflationary sovereign currency -- which is exactly why it was invented.

What’s perplexing to me is that the bears are stubbornly digging in, saying this is the beginning of the end.

The SEC, of course, has been careful to say it doesn’t embrace Bitcoin. SEC Chairman Gary Gensler hates Bitcoin more than anyone. But let’s stick with facts and money: The approval of the ETFs brings the asset class to the mainstream. On a grand scale, this is bullish, because the largest asset managers in the world such as BlackRock, Goldman Sachs, and Fidelity will now use commonly traded ETFS to allocate billions of dollars to Bitcoin and other crypto assets. Past history of this, such as the introduction of precious metals ETFs in 2004, triggered billions of dollars of flows into these new vehicles.

It could be the beginning of an even broader acceptance of cryptocurrency and Bitcoin, which is still far from mainstream.

Research from Galaxy Digital shows that hundreds of billions of dollars could move into the crypto markets over decades, because younger generations mistrust our financial system (for good reason) and are more sympathetic to cryptocurrency.

Bitcoin Economics 101

When it comes to Bitcoin and cryptocurrency, it pays to be pragmatic. Allocate some capital, but not enough to bet the farm. The secular trends are there; most of all, these three huge trends:

• Bitcoin and other cryptocurrencies are designed to limit supply, which is anathema to both the currency and equities markets, where new supply is constantly being created. The Bitcoin halving this year will further limit supply (the halving is a predetermined time when the algorithm slows the rate at which new cryptocurrency can be created).

• Bitcoin and other leading cryptocurrencies such as Ethereum now have a track record of outperforming the S&P Index for more than a decade. Yes, it is still a very risky asset and not fully understood. But outperforming for more than 10 years is more than a fad – that’s a secular trend.
• The data from Galaxy Digital and other firms indicates that younger generations have more distrust of the global financial system and embrace cryptocurrency more than older generations. This adoption has been growing over time. Youth is the future.

All of these secular trends will drive more acceptance of cryptocurrency over time.

Bring on the Network Effect!

The building of a new financial network creates value in itself. The value in cryptocurrency and Bitcoin also lies in technology innovation and network effect, just like the Internet.

When the Internet emerges in the 1990s, we had no idea how many use cases or apps we would see. Old timers were telling us we would never do banking or buy cars on the Internet. They couldn't be more wrong. Today we pretty much buy/sell everything on the Internet. Crypto could be like that – an Internet for finance.

Cryptocurrency is similar to the Internet. The adoption and the capability to share drive powerful network effect. Metcalfe’s Law states that the value increases exponentially with each user, squared (N squared). In 2019, Chartered Financial Analyst Timothy Peterson wrote some papers linking Bitcoin to Metcalfe's law.

The ETFs are a watershed moment. As a marketing event, it brings Bitcoin into the mainstream. As a technical event, it drives adoption and market share. As more funds move into cryptocurrency, the network effect becomes more powerful and it will incentivize more use cases and development, feeding itself.

As for those who don’t understand the technical power and network effect – well, you’ve been wrong for 14 years. When are you going to start being right?

(Disclosure: The author has owned a modest amount of cryptocurrency for 8 years, but he wishes he owned more. Long GBTC and ETHE.)