This week, the world saw oil prices falling into negative territory for the first time ever. As we reported, the deep decline in the price of oil was due to oversupply while the demand had a sharp fall as a result of coronavirus pandemic-induced economic shutdowns.
The United States Oil Fund however, was guaranteed to be a losing bet over time because the price of long-term oil contracts was higher than the spot price.
But still, investors piled into the exchange-traded fund, especially the traders on Robinhood and SoFI invest. These investors rushed to buy the USO ETF which has lost about 80% of its value this year while seeing a 300% increase in ownership month-over-month.
It is possible retail investors believed it was a bet on the spot price of oil. While the market is displaying a V-shaped recovery, the economy is not. Gabor Gurbacs, a digital asset strategist at VanEck said,
“Most 3X leveraged ETFs have been liquidated! Crude oil is trading in negative price territory! And some say Bitcoin is too volatile for a Bitcoin ETF.”
As a matter of fact, the deep loss in the USO Oil ETF resulted in its volatility to surpass that of Bitcoin. Gurbacs said,
“Maybe it's time for some self-reflection for those that say Bitcoin is too volatile compared to other assets.”
The oil market that has acted as a traditional safe haven asset “can no longer be considered a reliable store of value,” tweeted Cameron Winklevoss, co-founder of crypto exchange Gemini.
I do think it's weird that $USO exists and a Bitcoin ETF does not.
— Joe Weisenthal (@TheStalwart) April 24, 2020
And as Joe Weisenthal of Bloomberg pointed out, from an investor protection standpoint, “a bitcoin ETF is much more likely to reflect the price of what people think they’re getting better than what USO buyers think they’re buying.”
No legal or investment reason to not allow a Bitcoin ETF
A Bitcoin exchange-traded fund in the current environment compares favorably with oil ETFs. The leading digital asset lost about 50% of its value in the March crash but since then has recovered its losses and now trades above $7,500.
Over the years, the bitcoin market has matured and during the recent market turmoil, stock markets saw much higher volatility than the cryptocurrency. According to Bloomberg’s latest report, the ‘first-born’ crypto is in the process of transitioning to digital gold.
As Gurbacs shared, there are many benefits such as daily proof of reserves (NAV), transparent holdings and prices, high liquidity, proper tax documents, and investor protections that an ETF structure may bring to Bitcoin. He said,
“The public deserves a liquid, investable and physical Bitcoin investment vehicle. The ETF structure is perhaps the most suitable vehicle.”
Also, VanEck’s recent report found that just a small addition of bitcoin to a 60-40 (equity-bond) portfolio significantly reduced the volatility during the recent COVID-19 sell-off.
There is empirical evidence that bitcoin and commodities markets are similarly well-functioning capital markets, noted Gurbacs.
“There is no legal or investment reason to not allow a product like that,” said Jan Van Eck, CEO of VanEck in a recent interview. VanEck has been trying to get its own Bitcoin ETF approved for several years now.
During his interview with Bloomberg, he noted that bitcoin is not the only one with high volatility and an ETF “would just add to the ecosystem.”
In the macro backdrop where central banks are “going nuts,” he said, “the appetite for gold and bitcoin goes up.” The correlation between bitcoin and gold has already gone from zero before this year to 0.5 which is “super interesting.”
The signs of how volatile the oil market can be might now undercut some of the reasons for Bitcoin ETF approval delays. Although, “both have been independent overall markets,” so far, investor appetite in the traditional world is not as big for bitcoin as people might imagine, said Van Eck.
Overall, these past few weeks showed us that traditional markets have much worse massive dislocation. Meanwhile, retail and institutional interest in Bitcoin continues to rise, with some paying as much as 30% premium to get exposure to the digital asset.
Even SEC Commissioner, Hester Peirce has been a vocal supporter of ETF who said permitting regulated exchanges and institutional exchanges to enter the market would only lead to more “robust protections for retail investors” and “more effective surveillance for market manipulation and other fraudulent activity.”