Cryptocurrency caught fire during the pandemic, from classic blockchain projects like Bitcoin (BTC +0.98%) and Ethereum to whimsical alternatives like Dogecoin and Shiba Inu. The market increased 15 times in value between March 2020 and November 2021, peaking at around $3 trillion.
Of course, the tide turned shortly thereafter. The collapse of the Terra blockchain precipitated the bankruptcy of several cryptocurrency lenders and exchanges, triggering a crash that erased more than $2 trillion in value. The market fell about 75% between November 2021 and December 2022, dropping to $790 billion.
But the tide has since turned once again. The cryptocurrency market more than doubled during the past year as investors rotated back into risk assets. Its market capitalization currently stands at $1.9 trillion, but Morningstar analyst Michael Miller believes that figure could grow 240% to reach $6.4 trillion by 2032. Forecasts should always be treated with skepticism, but that estimate seems plausible.
Despite creating substantial wealth in the past, the cryptocurrency market remains quite small compared to the global stock market ($109 trillion) and the global fixed-income market ($135 trillion). Read on to learn why the iShares Bitcoin ETF Trust (IBIT +2.83%) is a worthwhile long-term investment for risk-tolerant investors.
CRYPTO: BTC
Key Data Points
Bitcoin is the cornerstone of the cryptocurrency market
Morningstar believes the cryptocurrency market could be worth $6.4 trillion by 2032. That estimate portends substantial upside in Bitcoin.
Specifically, Bitcoin accounts for 52% of the cryptocurrency market today, and it has been rangebound between 40% and 60% over the last three years. Assuming that pattern holds, a cryptocurrency market worth $6.4 trillion implies a Bitcoin valuation between $2.6 trillion and $3.8 trillion. For context, Bitcoin is currently worth $1 trillion. So the implied upside ranges from 160% to 280% by 2032. Investors can capitalize on that potential price appreciation by purchasing a spot Bitcoin ETF.
The Securities and Exchange Commission (SEC) approved 11 spot Bitcoin ETFs earlier this year. Those first-of-their-kind products purchase Bitcoin directly, and therefore track its price precisely. That differs from previously approved Bitcoin futures ETFs, which invest in futures contracts. Those products track the price of Bitcoin much less precisely. For instance, Bitcoin gained 115% over the last 12 months, but the ProShares Bitcoin Strategy ETF gained just 60%.
Additionally, spot Bitcoin ETFs greatly reduce friction by eliminating the hassle of specialized exchanges and blockchain wallets. That value proposition could bring more retail and institutional investors to the market, driving Bitcoin's price higher. Indeed, MicroStrategy CEO Michael Saylor believes Bitcoin could reach $500,000 in the next decade, implying 900% upside from its current price of $50,000.
NASDAQ: IBIT
Key Data Points
BlackRock's iShares Bitcoin Trust
Every spot Bitcoin ETF should do the same thing: purchase Bitcoin for the fund, divide the fund into shares, and sell those shares on the stock market. That means fees are the most important variable. Listed below are 11 spot Bitcoin ETFs (and their expense ratios) that have been approved by the SEC.
- Bitwise Bitcoin ETF Trust: 0.20%
- Ark 21Shares Bitcoin ETF: 0.21%
- Fidelity Wise Origin Bitcoin Fund: 0.25%
- iShares Bitcoin Trust: 0.25%
- Valkyrie Bitcoin Fund: 0.25%
- VanEck Bitcoin Trust: 0.25%
- Franklin Templeton Digital Trust: 0.29%
- WisdomTree Bitcoin Trust: 0.3%
- Invesco Galaxy Bitcoin ETF: 0.39%
- Hashdex Bitcoin ETF: 0.94%
- Grayscale Bitcoin Trust: 1.5%
I would eliminate most of those spot ETFs based on high fees, especially the Grayscale Bitcoin Trust. There is simply no reason to pay 1.5% -- meaning the annual fee on a $10,000 portfolio would total $150 -- when identical products can be purchased for less. Most of them have paused their fees for a limited time in order to generate more investor interest in the early going, but these discounts will go away over time.
Next, I would consider the issuer. BlackRock's iShares Bitcoin Trust stands out because BlackRock is the largest asset manager in the world. To be clear, the issuer matters far less than the fees, but larger issuers like BlackRock may be less prone to liquidity problems created by insufficient demand.
For instance, the iShares Bitcoin Trust currently trades at a modest premium to its net asset value, meaning investors are valuing the fund at a slight premium to Bitcoin itself. However, the Grayscale Bitcoin Trust trades at a discount to its net asset value.
I'll end with a word of caution. Bitcoin has historically been very volatile, and that is unlikely to change. Investors should be comfortable with the idea that the iShares Bitcoin Trust could lose 50% (or more) of its value from time to time in the future.
