Bitcoin – and other cryptocurrencies – are suddenly a lot more popular, thanks to the SEC’s long-awaited approval of spot ETFs for the world’s most ubiquitous cryptocurrency. The approval of Bitcoin ETF offerings by some of the biggest firms on Wall Street – Blackrock, Grayscale, and Franklin, among others – provides both the average, conservative individual investor, as well as institutional investors, an entrée into an asset that in recent years has outdone stocks, bonds, and even gold.
Of course, profiting from crypto is a bumpy road; unlike the Dow or S&P, crypto’s extreme highs and lows often fluctuate in a matter of hours, instead of the weeks or months other asset classes usually require. It’s not for everyone, even if Blackrock and company are now offering it. And while Bitcoin ETFs are traded under the aegis of the SEC, most Bitcoin, and all other cryptocurrencies, are traded on a less-regulated market – meaning that, despite SEC approval, they will be venturing into an investment whose price will be highly influenced by factors that they may not be familiar with. And because Bitcoin is a cryptocurrency, its performance will also be influenced by other cryptocurrencies not under the SEC’s purview.
In other words, investing in Bitcoin is likely to be a significantly different experience for investors; the fact that Wall Street firms are offering these ETFs doesn’t mean they will follow the rules that other, more traditional investments follow. Investors will thus likely seek out tools that can provide them with insight on what their Bitcoin holding is likely to do. What tools can investors utilize to reasonably predict what direction cryptocurrency will take?
Turning to Investment Advisors
Individual investors in a Wall Street Bitcoin ETF are likely to have access to, or have their assets managed, by an investment advisor – who will consider the usual criteria, such as past performance, current market conditions, and overall prospects before advising their client to buy. Institutional investors are likely to have whole departments dedicated to vetting investments, but the process is the same. Advisors will first analyze an asset’s prospectus – and Bitcoin ETF have a quite lengthy list of possible risks. Advisors will help clients develop a rational plan that includes their Bitcoin investment, ensuring that their portfolio will remain more or less intact even if the ETF loses all its value.
That’s how an advisor would treat any traditional investment – and with Bitcoin ETFs now offered by Wall Street firms joining that family of traditional investments, that’s how advisors, and their clients, are likely to treat Bitcoin investments. If it works for commodities, stocks, and bonds – many of which are plenty risky themselves – it should work for Bitcoin, too.
Relying on Sentiment-Based Analysis
What drives Bitcoin – and crypto in general – valuation? The usual suspects – supply (limited) and demand (high), forks, competition, regulations (or lack thereof) – that affect almost all assets. But one factor – sentiment – seems to affect crypto far more than it does other assets, and at times has been a major, if the not the key factor in crypto valuation. The short history of crypto is rife with examples of how social media messages – with Tesla and X owner Elon Musk’s tweets a prime example – of how an influencer’s opinion on crypto can move markets. Thus, if an investor could figure out a way to analyze sentiment on crypto and Bitcoin specifically, they would likely do very well with their investment.
The same strategy could work for institutional investors as well – with companies setting up departments that could conduct the required analysis on their own, or using the plethora of services and tools available. Guides can direct investors to the social media accounts of top crypto influencers, and more sentiment indices can be garnered from top crypto news sites. The web is full of success stories about investors who “bought on the rumor and sold on the news” – a classic definition of sentiment trading.
HODLing as a Fallback
Crypto experts will tell you that “holding on for dear life” is likely the best and most successful trading strategy. It’s a strategy based on historical data – and seen from that perspective, it makes sense. Over the ten year period ending with 2023, data shows that “Bitcoin has outperformed the S&P 500 close to 2,200-fold.” HODLing is also the most likely strategy an investor in a Wall Street-offered Bitcoin ETF is likely to adopt. The crypto ETF space is just a few months old, but given the sharp increase in Bitcoin investments driven by the ETF offerings, HODLing may end up being the most popular strategy for individual investors.
But that is unlikely to be the case for institutional investors, who have to present their investors to boards of directors for regular review. Deserved or not, Bitcoin investments – even those offered by Wall Street firms – still have a reputation as outliers. Even for board members who are willing to try something new, holding onto Bitcoin as its valuation swings by tens of thousands of dollars may be a bit much. Those institutions need a system that will enable them to intelligently buy and sell as needed – with a reasonable expectation that they are going to make money off their investment.
Opening the Doors to AI
Institutions – along with individual investors – could benefit from AI systems that enable them to build the technical indicators that are most appropriate for their investment position, along with the many other factors that go into Bitcoin valuation. While sentiment is a major factor in Bitcoin and crypto valuation, it is far from the only one; world events, regulations (even in other sectors), economic reports, job reports, trading volume, historical activity, and a host of other factors could influence values, even if the news doesn’t make it to social media.
AI systems using advanced methods like machine learning can examine and integrate data from the thousands of factors that could influence the asset’s price, providing guidance to investors on its likely price direction based on historical and current data and creating more advanced algorithms for automated execution.
The SEC’s approval of ETFs has granted Bitcoin – and other cryptocurrencies – entrée into the world of “proper” investing, the kind of investing preferred by many individual investors, and the vast majority of institutional investors. Bitcoin ETFs have their risks – but they can be very lucrative. With the strategies listed here, both individual and institutional investors could find themselves on the winning end of what could be a very savvy investment.
