For investors, especially institutional investors and organizations like pension and insurance funds, the newly-approved Bitcoin spot ETFs may appear to be an easy and less risky way to get into what has been one of the hottest investments in recent years. Everyone has heard the stories about Bitcoin – and other forms of crypto – millionaires and billionaires. And now, thanks to the good offices of top Wall Street investment funds like Blackrock, such opportunities are open to money managers and institutions seeking to grow and diversify their portfolios.
The SEC’s approval of Bitcoin ETFs has no doubt boosted investor confidence in crypto. This is clear from the wild runup in Bitcoin, and crypto valuations in general, since the January 10 decision by the SEC to allow investment firms to offer Bitcoin spot ETFs. There are now 11 such ETFs. On January 10th 2024, one Bitcoin was worth about $46,000; by the end of March, it was trading at around $65,000. While some of that rise is due to the prospective halving of Bitcoin in April, much of it, according to experts, is the entry into the market of a new pool of investors – financial institutions.
Crypto ETFs follow different rules
But investors should not forget about the unique nature of this asset, especially if they are looking to actively trade it, rather than hold it and hope for the best. All assets have risks, but the rules for crypto are different than for other investments, and those rules are not based on traditional market behavior. Crypto spot ETFs are like sheep in wolves’ clothing; while they look like any other ETF-based asset, they do not play by the same market rules that traditional stock fund ETFs and the like do. The factors that influence crypto valuations are difficult to determine, and constantly change – unlike the factors that influence valuations of other investments. This makes the technical aspects and movement of crypto especially important.
Oil prices rise and fall based on factors like the weather, consumer demand, electricity use, and other quantifiable data. The same goes for other assets, like fiat currency, where prices are influenced by national bank decisions on interest rates, inflation issues, and the like. What influences crypto valuations? Well, in 2024, the major factor in those valuations has been SEC approval of Bitcoin spot ETFs – which is just an approval to trade, and far from an endorsement of the utility or valuation of Bitcoin, or any other cryptocurrency, as well as the upcoming halving.
Other factors that have influenced the huge rises and spectacular falls of crypto in the past included things as diverse as social media, influencer tweets, large trades that attract media attention, and even something as esoteric as the true identity of Satoshi Nakamoto, the alleged father of Bitcoin. And of course, there are the usual economic factors like inflation, government regulation, business climate, and so on.
A young asset with potential
In addition, unlike commodities like oil or sugar, or even fiat currencies like the dollar and euro, cryptocurrencies still have limited use. Oil is used to pretty much run civilization, fiat currencies are legal tender in the country that issues them and can be traded for things, and sugar can be eaten.
While more and more people and businesses are accepting cryptocurrency as a form of payment, the total number in 2024 is about 6,500 – a miniscule number compared to all the businesses that don’t accept it. In essence, the only thing you can buy with crypto is – more crypto. On the other hand, many investors believe that crypto does have inherent value, because of its blockchain associations, among other reasons. But this, too, is a speculative concept, as the breakthrough for an indispensable use case for blockchain has yet to arrive.
Perhaps the most relevant comparison is to gold, another asset that is not inherently useful in and of itself. Rather, gold is valued for the idea of safety. In the same way, crypto is likely on a path to being valued for ideas, including decentralization, innovation, security and a digital-first approach. Measuring the rise and fall of these ideas and calculating how they should affect crypto values is not an easy task.
AI is critical to effectively risk management the technical factors in crypto investments
This is where an algorithmic and quantitative approach to reading the volatility can help investors. Advanced AI models can gather and analyze data from thousands of sources, and identify real-world events with the “what If” scenarios. With this technology, responsible investors are no longer limited to simply riding out volatility, but can take advantage of market movements, aiming to make gains and avoid losses.
For example, oil may be down, unemployment may be up, and inflation may be high, all factors that could press stock prices downwards – but meanwhile, the crypto world may be celebrating a new all-time high for Bitcoin. Is there a rise or reason for crypto doing very well while the rest of the economy tanks? Yes, there is – and an AI system can help figure out those factors, and recommend buy or sell signals that could help investors make money, while avoiding losses.
Large Asset Managers Must Go to the Next level of Investing
If large Wall Street firms are offering crypto investments, they need to have the appropriate sophisticated tools, including AI, to manage them. AI, especially when crypto’s current boost from regulation wears off, will help institutions still holding their crypto ETFs better navigate the market. Perhaps more importantly, Bitcoin ETFs are just one reason why institutions need to embrace a more AI-drive approach to investing. With innovation moving rapidly, AI is emerging as a key tool for risk management and trading for all assets, enabling investors to move away from a simplistic approach of simply holding assets, especially the most volatile ones that contain the greatest risks, as well as the greatest potential opportunities.
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