Globalisation and digitisation have transformed many aspects of our lives, so it is no surprise that currencies and money are undergoing the same evolution. The use of physical cash is dwindling, and digital transactions are the new standard. Now we have digital currencies known as ‘crypto currencies’. 

Once considered science fiction, cryptocurrencies, such as Bitcoin, have gained the attention of investors.  Cryptocurrencies can be used to pay for goods and services, just like we do with paper-based money. They can also be a store of value, like gold.  

A unit of cryptocurrency is known as a “token” or “coin”, and these are stored in an online “wallet”. In the same way that investors use specific exchanges like the ASX for trading shares and Exchange Traded Funds (ETFs), investors can buy and sell units of various cryptocurrencies through specific online exchanges. 

An important differentiator of cryptocurrencies is that they are “decentralised”, meaning they operate independently of any government or bank. Traditional currencies are managed by a country or region’s central bank, which influences their value through changes in interest rates and supply controls via monetary policy. Cryptocurrency prices are not subject to central bank control. 

Because it relies on an encrypted peer-to-peer system of exchange, cryptocurrency is derived from the word ‘cryptography’ - the process of coding information so only the person intended to receive said information can decipher it. 

However, investors should be mindful of the risk of crypto wallets and exchanges being raided and assets stolen. According to IT News, hackers stole US$1.38 billion in cryptocurrency during the first half of 2024.

Understanding Bitcoin

VanEck’s view is that Bitcoin is likely the most established and accepted cryptocurrency. 

Since inception in 2009, Bitcoin’s increase in value has been remarkable. From trading below A$500 in its early years, Bitcoin’s current value hovers around AUD$95,000. Bitcoin’s performance can be characterised as extremely volatile. 

Chart 1: Since 2013, bitcoin’s price has experienced dramatic highs and lows

Source: VanEck, Morningstar. Representing the price of bitcoin is the MarketVector™ Bitcoin Benchmark Rate. Past performance is not indicative of future performance.  

Like gold, Bitcoins are produced via “mining”. Only, instead of using specialised mining equipment such as drills, explosives, longwalls and excavators, bitcoin miners use hyper-sophisticated computers to compete to solve complex mathematical problems. Bitcoins are the reward. 

There will only ever be 21 million Bitcoins in existence. This supply cap was designed intentionally and is one of the primary characteristics of Bitcoin. Furthermore, Bitcoin has “halvings” programmed into it. At each halving, Bitcoin miners will earn half as many Bitcoins as before the halving event. Halvings occur roughly every four years and result in a slowdown in the rate at which new Bitcoins are introduced into circulation until it eventually reaches zero (estimated to occur around the year 2140). The last halving occurred on 20 April 2024. 

VanEck believes investors have also been attracted to Bitcoin as a portfolio diversifier, given its low correlation to traditional asset classes, as the table below shows.

[Editor’s Note: This means the price of Bitcoin does not rise or fall in a similar way to equities or bonds, which may provide asset diversification for portfolios].

Chart 2: Bitcoin’s correlation to traditional asset classes

Source Morningstar Direct, Ten-year correlation, 1 May 2014 to 30 April 2024. Indices used: Australian Bonds is Bloomberg AusBond Composite 0+Y Index, Global bonds is Bloomberg Global Aggregate TR Hdg AUD Index, Bitcoin is MarketVector Bitcoin PR Index, Cash is AusBond Bank Bill Index, EM equities is MSCI Emerging Markets Index, Global equities is MSCI World ex-Australia Index, A-REITs is S&P/ASX 200 A-REIT Index, Australian equities is S&P/ASX 200 Index, Gold is LBMA Gold Price PM.

Milestone year

This year marked a milestone for Bitcoin, with the US Securities and Exchange Commission (SEC) approving the first spot Bitcoin ETF in the US. So, too, has the ASX, for Australia.

In VanEck’s view, this is a step towards the maturity and mainstream acceptance of Bitcoin, and digital assets broadly. It has enabled the wealth-management community and individuals to access Bitcoin via a regulated and insured investment vehicle, opening up the asset class to institutional investors, including hedge funds, sovereign wealth funds, pension funds, and registered investment advisers. [Editor's note: The VanEck Bitcoin ETF (ASX:VBTC) provides investors with exposure to Bitcoin and aims to achieve this by investing in the VanEck Bitcoin Trust (‘HODL’). The Fund primarily acts as a ‘feeder fund’ employing a passive management strategy.]

In VanEck’s view, gaining exposure to Bitcoin via an ETF may provide access without the complexity or risk of owning Bitcoin directly. Moreover, gaining exposure to Bitcoin via an exchange can provide additional protections for investors, due to exchange requirements for quoted investment products. 

However, investors should be aware that an ETF that tracks the price of Bitcoin could potentially exhibit high price volatility and deliver a negative return in a year if the price of Bitcoin falls and should seek financial advice before making any investment decision.

[Editor’s Note: ETF product issuers may offer access to ETFs that hold crypto-assets. When investors buy an ETF that is available on the ASX, the units in the ETF can be held on the investors’ holder identification number (HIN) alongside their other investments, such as shares. When investing in an ETF that holds crypto-assets investors should read the associated product disclosure statement to understand the benefits and risks of getting economic exposure to the crypto-asset through the ETF structure.]

Conclusion

VanEck recognises that investing in Bitcoin can be polarising and confusing. Bitcoin is a complex asset class with a relatively limited history. 

Although the ETF structure provides some benefits for those looking to access Bitcoin, investors should be mindful of not only the investment risk of the asset class itself but the capability and longevity of the ETF issuer. Bitcoin ETFs have only been available in Australia for a short time. 

DISCLAIMER

VanEck Investments Limited (ACN 146 596 116 AFSL 416755) (VanEck) is the issuer and responsible entity of all VanEck exchange traded funds trading on the ASX. This content is for educational purposes only and does not constitute financial advice. It has been prepared without considering your objectives, financial situation or needs. Before acting on information in this article, consider its appropriateness and accuracy, regarding your objectives, financial situation and needs. Independent advice should be obtained from an Australian financial services licensee before making investment decisions. Any views expressed are opinions of the author at the time of writing and is not a recommendation to act.