Nearly a dozen new bitcoin funds began trading in U.S. markets for the first time Thursday, providing increased access to the cryptocurrency for everyday investors.
The new exchange-traded funds, or ETFs, give investors an asset that closely tracks the price of bitcoin.
The Securities and Exchange Commission approved 11 funds from asset managers such as Blackrock, Invesco, and Fidelity late Wednesday. The wave of approvals may work in your favor as fund managers seek to attract investors by competing on fees.
Besides being a win for the fund managers, the approvals are also a win for the cryptocurrency industry, which has needed a victory after nearly two years of turmoil, including the failure of several crypto firms, most notably FTX in November 2022.
The SEC’s approval, however, was lukewarm at best. Gary Gensler, the agency’s chairman, has repeatedly said cryptocurrencies need more regulation and investor protections.
“Investors should remain cautious about the myriad risks associated with bitcoin and products whose value is tied to crypto,” Gensler said.
The regulatory green light had been anticipated for several months, however, and the price of bitcoin has jumped about 70% since October on the belief that bitcoin ETFs will drive up demand for the cryptocurrency.
Bitcoin rose 2% in early trading Thursday, and trading in the new ETFs was mixed.
Some analysts think that ETFs may help stabilize crypto prices by broadening their use and potential audience. But many remain concerned that crypto ETFs will place too much risk and volatility into Americans’ retirement accounts.
“The notorious price volatility of bitcoin, as well as its fluctuating values against stablecoins and other cryptocurrencies, could expose mainstream investors to a less familiar spectrum of investment risks,” said Yiannis Giokas, senior director of Moody’s Analytics.
Here are some things to know about Bitcoin ETFs.
WHY ALL THE EXCITEMENT OVER A BITCOIN ETF?
An exchange-traded fund, or ETF, is an easy way to invest in something or a group of things, like gold or junk bonds, without having to take possession of those assets. Unlike traditional mutual funds, ETFs trade like stocks, which means they can be bought and sold throughout the day.
Since the inception of Bitcoin, anyone wanting to own one would have to buy it. That in turn would mean either having to learn what a cold wallet is or having to open an account at a crypto trading platform like Coinbase or Binance.
A spot bitcoin ETF could open the door to many new investors who don’t want to take such extra steps.
The price of bitcoin has already soared in anticipation of the SEC’s approval, with bitcoin trading at $47,500 Thursday, up from around $27,000 in mid-October. The price had sunk as low as $16,000 in November of 2022 following the implosion of the crypto exchange FTX.
HOW WOULD THE ETF WORK?
New bitcoin ETFs will perform like the SPDR Gold Shares ETF (GLD), which allows anyone to invest in gold without having to find someplace to store a bar or protect it. It’s the same reason some people invest in the SPDR Bloomberg High Yield Bond ETF (JNK), which lets investors simply buy one thing instead of the more than 1,000 low-quality bonds that make up the index.
The Bitcoin Strategy ETF (BITO) has been in existence since 2021, but it holds futures related to Bitcoin, not the cryptocurrency itself. Those prices do not track as closely as a straight-up Bitcoin ETF.
HOW MANY BITCOIN ETFS COULD THERE BE?
The SEC said it gave approval to 11 ETFs, but more are certain to apply for trading in the coming months.
WHAT ARE THE DISADVANTAGES OF AN ETF?
Longtime crypto fans might object. Cryptocurrencies like Bitcoin were created in part due to mistrust of the traditional financial system. Wall Street would become an intermediary between investors and cryptocurrency in the case of ETFs.
ETFs also charge fees, though they tend to be relatively low compared with the overall financial industry. These fees are shown through what’s called the expense ratio, which indicates how much of a fund’s assets the ETF will take each year to cover its costs.
WHEN IS IT BETTER TO HOLD ACTUAL BITCOIN?
An ETF will not put actual cryptocurrency into investors’ accounts, meaning that they cannot use it. Also, an ETF would not provide investors with the same anonymity that crypto does, one of the big draws for many crypto investors.
WHAT CONCERNS SHOULD INVESTORS HAVE?
The biggest concern for an investor in one of these ETFs is the notorious volatility in the price of bitcoin.
Despite failing to catch on as a replacement for fiat, or paper, currencies, bitcoin soared to nearly $68,000 in November of 2021. A year later it plunged below $20,000 as investors shunned riskier assets and a series of company blowups and scandals shook faith in the crypto industry.
Even as regulators and law enforcement crackdown on some of the cryptos' bad actors, like Sam Bankman-Fried of FTX, the industry still has a “Wild West” feel to it.
A hack of the SEC’s X account this week, when a fake tweet claimed the ETFs had been approved, sent prices soaring and raised questions about both the ability of scammers to manipulate the market and the SEC’s ability to stop them.
Based on the latest Consumer Price Index report released Thursday, slow progress continues on inflation, even as overall price pressures ticked up in December.
The Bureau of Labor Statistics reported that the Consumer Price Index rose 3.4% on an annual basis and 0.3% every month in December. The yearly figure was higher than November’s reading and economist expectations of 3.2%. More than half the monthly gains were driven by increases in shelter costs.
Despite the reading, the Federal Reserve is expected to cut interest rates in 2024, potentially as soon as its March policy-setting meeting.
“Today’s report shows core inflation essentially holding steady, which should allow the Fed to cut in March,” says Preston Caldwell, chief U.S. economist at Morningstar. He notes that on a three-month annualized basis, the inflation rate came in at 1.8% in December, depressed by a sharp drop in energy prices.
Core CPI, which excludes volatile food and energy prices, rose 3.9% on an annual basis and 0.3% every month in December. Both readings were slightly higher than economists expected, though annual core inflation has now dropped below 4% for the first time since May.
Headline inflation fell sharply over 2023, from 6.4% on an annual basis in January to a little more than half that rate in December. Thursday’s data underscores that progress on the Fed’s inflation fight could be a little slower and choppier during its so-called “last mile” than it was a year ago.
CPI vs. Core CPI
December CPI Report Key Stats
- CPI climbed 0.3% for the month after rising 0.1% in November.
- Core CPI climbed 0.3% after rising by the same amount in November.
- CPI increased 3.4% year over year after rising by 3.1% the prior month.
- Core CPI climbed 3.9% from year-ago levels after increasing 4.0% in November.
Caldwell adds that core inflation, which has proved stickier than the headline figure, has also remained relatively steady over the past three months. Core prices rose 3.3% on a three-month annualized basis in December, he says, compared with 3.4% in November.
Consumer Price Index
Shelter Inflation Still Sticky
Much of the recent stickiness in core inflation is attributable to high shelter prices, which include rent prices and owner’s equivalent housing expenses. “Shelter (housing) inflation continues to run hot,” according to Caldwell, reaching 5.1% on a three-month annualized basis in December. Excluding the shelter category, core inflation would have been just 2% last month.
In general, measures of housing costs tend to show up in inflation data with a lag. Economists widely expect shelter inflation to fall in the months ahead as the data catches up with ongoing declines in rent prices.
“Core inflation will return to normal if shelter inflation subsides, which should be around the corner,” Caldwell says, though he notes that “the exact timing is uncertain.”
Change in Selected CPI Components
When Will the Fed Cut Rates?
The Fed has signaled to markets that it has reached the end of its rate hiking cycle. Now investors are looking ahead to rate cuts, trying to determine when and how often they will come. Forecasts by central bankers at their last meeting suggested a total of three cuts in 2024, but bond market investors are expecting at least five, according to the CME FedWatch Tool.
The Fed is widely expected to leave rates at the current target range of 5.25%-5.50% at its meeting later this month. Some strategists expect rate cuts as soon as March, and the bond market agrees. Others believe cuts are more likely in the second half of the year.
Caldwell is in the March camp, adding that PCE inflation—a separate measure of price growth that the Fed prefers—has dropped to 1.9% on an annualized basis over the past six months, below the central bank’s 2% target.
That healthy PCE reading means that despite Thursday’s hotter-than-expected headline number, Caldwell believes the Fed is likely to cut rates in March. “Markets appear to agree with our assessment,” he says, “with about a two-thirds implied probability of a March cut.”
Expectations for the March 2024 Federal Reserve Meeting
As always, those expectations could shift depending on economic data in the weeks and months ahead.
Inflation has hit consumers across the US hard. Prices on grocery and energy bills jumped, housing prices surged, and the Fed’s responding interest rate hikes have pushed mortgage and credit card interest rates to record highs.
Even as inflation continues a steady decline from its mid-2022 peak of 9.1%, Americans in some cities still feel its claws more than in others. Inflation currently sits at 3.4%, still above the Fed’s 2% target rate. This means consumers still have less purchasing power, even as wages race to meet rising prices. For example, in mid-2023, an average American household needed about $709 more than they did in 2021 to purchase the same goods.
Consumers living in Dallas, Texas; Miami, Florida; and Honolulu, Hawai’i are taking the biggest hit from inflation, according to a WalletHub analysis of the most recent inflation data from the US Bureau of Labor Statistics (BLS). The personal finance company compared consumer prices in major metropolitan areas from December with those from October and the year before (December 2022) to score each city’s level of economic suffering from 0 to 100 (100 = highest suffering).
Even as U.S. inflation has eased in the last year, an unusual culprit has emerged in recent months as a surprise force in preventing consumer prices from falling even further: auto insurance.
Consumer prices in December overall rose 3.4% from a year earlier, the Labor Department said on Thursday in the release of the monthly Consumer Price Index, more than the 3.2% economists polled by Reuters had expected and up from 3.1% in November.
Several familiar categories accounted for much of the overshoot, with stubbornly high shelter costs in particular accounting for close to two-thirds of the increase. But the highest annual increase for car insurance in nearly half a century made a notable upward contribution that may not be fading soon.
"The behavior of the MVI (motor vehicle insurance) component of the CPI has truly been remarkable, and I don’t see any evidence of near-term relief," Tom Simons, U.S. economist at Jefferies, said in an email.
Motor vehicle insurance premiums skyrocketed by 20.3% in December from a year earlier, the largest increase since the mid-1970s, the government data showed.
Premiums have risen persistently all year every month, too, climbing 1.5% last month. That is roughly on par with the average monthly increase over the last year, a rate that exceeds all monthly increases before the pandemic.
What's more, auto insurance - an expense category that has rarely registered as a hefty influence in overall inflation - accounted for 15% of headline price increases over the final quarter of 2023.
'STICKY STUFF'
Simons said several factors are adding to the rising premiums, such as increasing costs for the labor and parts to repair damaged vehicles, and the overall rise in vehicle prices over the last several years, which lifts the underlying collateral being insured. Declining demand from reinsurers is also a factor, he said, and "natural disaster risk is probably contributing on the margin."
Auto insurance is typically regulated on a state-by-state basis, and costs are subject to major regional differences.
"We may have some authorities there as well but those sit with independent agencies," White House National Economic Council Director Lael Brainard said when asked about the outsized jump in insurance costs. There is also a "call to big business to bring down those prices that they increased so much when supply chains were snarled."
All of the U.S. government's independent agencies have "a real focus on tackling unfair and deceptive price practices," Brainard said.
Still unclear is the degree to which insurance costs alone can impede further progress on inflation and disrupt the outlook for Federal Reserve interest rate cuts later this year.
"It’s hard for me to see how this might increase so much more from here that it would have an influence on monetary policy," Simons said. "I don’t think we’re looking at another 10-20% increase from here for the next 12 months, but again, I’m no expert on insurance."
"This is a great example of the 'sticky stuff' in the inflation data ... prices for services that are largely non-discretionary and have no substitute."
China's exports grew at a faster pace in December, while deflationary pressures persisted last month, keeping alive expectations for more policy easing measures to shore up an economy carrying significant pockets of weakness into 2024.
Chinese policymakers could breathe a sigh of relief on signs global trade is slowly turning a corner with the prospect of lower borrowing costs on the horizon, but a protracted property crisis, cautious consumers, and geopolitical challenges point to another bumpy year for the world's second-biggest economy.
Exports grew 2.3% from a year earlier in December, customs data showed on Friday, compared with a 0.5% increase in November and beating the 1.7% boost expected in a Reuters poll. Imports grew by 0.2% year-on-year, missing forecasts for a 0.3% increase but still reversing a 0.6% drop a month prior.
"The better export data is first and foremost driven by semiconductors and electronics, and the recovery on that side comes from a cyclical rebound in consumer demand overseas," said Xu Tianchen, senior economist at the Economist Intelligence Unit.
Xu said the figure was also buoyed by a low statistical base since "there was severe disruption to exports last December following China's abrupt reopening."
The improved Chinese export data joins those from South Korea, Germany, and Taiwan in suggesting global trade is starting to mount a comeback, after higher interest rates in the United States and Europe crimped demand over 2023.
The United Nations has warned of a likely contraction in goods trade by $2 trillion or 8% last year.
South Korea's exports, a closely watched indicator of global trade, rose for a third month in December, while the latest German export data for November surprised on the upside.
Analysts also anticipate that interest rates will drop at least 1.5 percentage points in the United States and Europe this year, which should improve demand for imported goods.
And yet, consumer prices in China fell for a third month in December while factory-gate prices extended a more-than-year-long decline, separate data from the National Bureau of Statistics showed, highlighting the persistence of deflationary forces in the Asian giant's economy.
The consumer price index rose 0.2% in 2023, the slowest pace since 2009, and the full-year producer price index fell 3.0%, marking the steepest downturn since 2015.
"The deflationary pressure in China's economy remains as domestic demand is still weak. The property sector continues to weigh on the economy," said Zhiwei Zhang, chief economist at Pinpoint Asset Management.
"Exports improved on the margin... but exports as a pillar for growth in China are not strong enough to boost overall domestic demand," he said.
Chinese policymakers also will have to contend with underpowered overseas economies, with the World Bank on Tuesday warning that global growth is set to slow for a third year in a row.
"New foreign orders for Chinese producers increased significantly last month, but it's not a long-term trend," said Dan Wang, chief economist at Hang Seng Bank China.
U.S.-listed bitcoin exchange-traded funds (ETFs) saw $4.6 billion worth of shares trade hands as of Thursday afternoon, according to LSEG data, as investors jumped into the landmark products approved by the U.S. securities regulator on Wednesday.
The products mark a watershed moment for the cryptocurrency industry that will test whether digital assets - still viewed by many professionals as risky - can gain broader acceptance as an investment.
Eleven spot bitcoin ETFs - including BlackRock's iShares Bitcoin Trust (IBIT.O), Grayscale Bitcoin Trust (GBTC.P), and ARK 21Shares Bitcoin ETF (ARKB.Z), among others - began trading Thursday morning, kicking off a fierce competition for market share.
Grayscale, BlackRock, and Fidelity dominated trading volumes, the LSEG data showed.
"Trading volumes have been relatively strong for new ETF products," said Todd Rosenbluth, strategist at VettaFi. "But this is a longer race than just a single day's trading.
The green light from the U.S. Securities and Exchange Commission for the products finally came late on Wednesday, following a decade-long tussle with the crypto industry.
Some executives called out bitcoin as a high-risk investment, and Vanguard - the largest provider of mutual funds - said it had no plans to make the new batch of spot bitcoin ETFs available on its platform to its brokerage clients.
The SEC had earlier rejected all spot bitcoin ETFs on investor protection concerns. SEC Chair Gary Gensler said in a statement on Wednesday that the approvals were not an endorsement of Bitcoin, calling it a "speculative, volatile asset."
The ETF launches lifted the price of bitcoin up to its highest level since December 2021. It was last up 0.77% at $46,303, while the price of ether, the second-largest cryptocurrency, was up 2.79% at $2597.95.
RACE FOR MARKET SHARE
The regulatory nod sparked intense competition for market share among the issuers, some of whom slashed the fees for their products well below the U.S. ETF industry's standard even before Thursday's launch.
Fees on the new bitcoin ETFs range from 0.2% to 1.5%, with many firms also offering to waive fees entirely for a certain period or for a certain dollar volume of assets. After its ETF started trading, Valkyrie cut its fees a second time to 0.25% and waived them for the first three months.
Grayscale was approved to convert its existing bitcoin trust into an ETF on Thursday, overnight creating the world's largest bitcoin ETF with more than $28 billion in assets under management.
Estimates for how much spot bitcoin ETFs could reel in vary widely. Analysts at Bernstein estimated that flows will build up gradually to cross $10 billion in 2024, while Standard Chartered analysts this week said the ETFs could draw $50 billion to $100 billion this year alone. Other analysts have said inflows could be $55 billion over five years.
As the ETFs began trading on Thursday, market participants were closely watching bid-ask spreads the difference between the price for a trader to buy into an ETF and the price at it can be sold. ETFs with narrower spreads are typically viewed as more desirable.
Trading volume, internal plumbing, and the number of participants involved "are critically important to driving the spreads to a good spot," said Jason Stoneberg, director of product strategy at Invesco, whose ETF with Galaxy Digital debuted on Thursday.
Some analysts cautioned that the euphoria around the approval might be premature. The broader investment community still views cryptocurrencies as risky, with scandals such as the implosion of crypto exchange FTX in 2022 adding to investors’ wariness.
A Vanguard spokeswoman said the firm had no plans to launch its own crypto investment products, and that its focus remains on core asset classes such as stocks, bonds, and cash, which it views "as the blocks of a well-balanced, long-term investment portfolio."
Speaking at a webinar on Thursday, Sharmin Mossavar-Rahmani, head of the Investment Strategy Group and chief investment officer of Wealth Management at Goldman Sachs, said cryptocurrencies had no place in an investment portfolio.
"When you think about it, where is there any value to something like bitcoin?," she said. "We don’t think it is an asset class to invest in."
CRYPTO STOCKS GAIN
Still, some expect the products to pave the way for even more innovative crypto ETFs, including spot ether products.
Grayscale CEO Michael Sonnenshein said in an interview Thursday that the firm plans to file for a covered call ETF to allow investors to generate income from options on its spot bitcoin product.
Cryptocurrency-related stocks initially climbed higher on Thursday, but ended the day lower, with bitcoin miners Riot Platforms (RIOT.O) and Marathon Digital (MARA.O) dropping 15.8% and 12.6% respectively.
Bitcoin investor Microstrategy (MSTR.O) fell 5.2% and crypto exchange Coinbase (COIN.O) 6.7%. The ProShares Bitcoin Strategy ETF, which tracks bitcoin futures, gained 0.44%.
Also on Thursday, Circle Internet Financial, the company behind stablecoin USDC, said it had confidentially filed for a U.S. initial public offering. Circle controls the issuance and governance of USDC, a cryptocurrency pegged to the U.S. dollar.
Rental firm Hertz Global Holdings (HTZ.O) is selling about 20,000 electric vehicles, including Teslas, from its U.S. fleet about two years after a deal with the automaker to offer its vehicles for rent, in another sign that EV demand has cooled.
Hertz will instead opt for gas-powered vehicles, it said on Thursday, citing higher expenses related to collision and damage for EVs even though it had aimed to convert 25% of its fleet to electric by 2024 end.
CEO Stephen Scherr had last year at the JPMorgan Auto Conference flagged headwinds from higher expenses for its EVs, particularly Teslas.
Hertz even limited the torque and speed on the EVs and offered it to experienced users on the platform to make them easier to adapt after certain users had front-end collisions, he said.
Shares of the company, which also operates vehicles from Swedish EV maker Polestar among others, fell about 4%. Tesla's (TSLA.O) stock was down about 3%.
Hertz also expects about $245 million in charges related to depreciation expenses from the EV sale in the fourth quarter of 2023.
BUMPY ROAD FOR EV GROWTH
Its decision underscores the bumpy road EVs have hit as their sales growth slows, causing carmakers like General Motors (GM.N) and Ford (F.N) to scale back production plans.
Morgan Stanley analyst Adam Jonas said in a note Hertz's move was another sign that EV expectations need to be "reset downward".
While consumers enjoy the driving experience and fuel savings (per mile) of an EV, Jonas said there are other "hidden costs to EV ownership".
"Expenses related to collision and damage, primarily associated with EVs, remained high in the quarter," Hertz said in a regulatory filing on Thursday.
The company, which had earlier planned to order 100,000 Tesla vehicles by 2022 end and 65,000 units from Polestar over five years, said it would focus on improving profitability for the rest of its EV fleet.
German rental car company Sixt said in December it had not purchased Tesla vehicles since 2022 and was selling its fleet of Teslas "as part of our regular de-fleeting process".
It still plans to offer a range of electrified vehicles and "stick to our goal to electrify 70-90 percent of our rental fleet in Europe by 2030", it said on Thursday.
USED-EV PRICES DROP
Meanwhile, wholesale used EV prices fell for most of 2023 as prices for new EVs fell and inventories of unsold electric vehicles rose, according to Cox Automotive data.
Cox forecast before Hertz's decision that used EV prices would decline more than overall used vehicle prices in 2024.
"While 20,000 cars isn't a large number in the total used vehicle market, it does mean Hertz will be taking a major loss on each of these sales while further contributing to the trend of falling used EV values," iSeeCars.com analyst Karl Brauer said.
Hertz is selling some Tesla Model 3s for as low as about $20,000, nearly half the purchase price for the cheapest variant of the compact sedan, its used car website showed.
It lists more than 700 EVs on sale, including BMW's i3, Chevrolet's Bolt, and Tesla's Model 3 and Model Y SUVs.
Microsoft (MSFT.O) on Thursday briefly overtook Apple (AAPL.O) as the world's most valuable company for the first time since 2021 after the iPhone maker's shares made a weak start to the year on growing concerns over demand.
Microsoft's shares have risen sharply since last year, thanks to the early lead the company has taken in generative artificial intelligence through an investment in ChatGPT-maker OpenAI.
Microsoft's stock closed 0.5% higher, giving it a market valuation of $2.859 trillion. It rose as much as 2% during the session and the company was briefly worth $2.903 trillion.
Shares of Apple closed 0.3% lower, giving the company a market capitalization of $2.886 trillion. Microsoft and Apple have jostled for top spot over the years.
"It was inevitable that Microsoft would overtake Apple since Microsoft is growing faster and has more to benefit from the generative AI revolution," said D.A. Davidson analyst Gil Luria.
Microsoft has incorporated OpenAI's technology across its suite of productivity software, a move that helped spark a rebound in its cloud-computing business in the July-September quarter.
Apple, meanwhile, has been grappling with weakening demand, including for the iPhone, its biggest cash cow. Demand in China, a major market, has slumped as the country's economy makes a slow recovery from the pandemic and a resurgent Huawei (HWT.UL) chips away at its market share.
"China could be a drag on performance over the coming years," brokerage Redburn Atlantic said in a client note on Wednesday, downgrading Apple's shares to "neutral".
At least three of the 41 analysts covering Apple have lowered their ratings since the start of 2024.
Shares of Cupertino, California-based Apple have fallen 3.3% in January as of the last close, compared with a 1.8% rise in Microsoft.
Both stocks are expensive in terms of their share price-to-earnings (PE) ratio, a common method of valuing publicly listed companies.
Apple is trading at a forward PE of 28, well above its average of 19 over the past 10 years, according to LSEG data.
Microsoft is trading around 31 times forward earnings, above its 10-year average of 24.
Shares of Apple, whose market capitalization peaked at $3.081 trillion on Dec. 14, ended last year with a gain of 48%. That was lower than the 57% rise posted by Microsoft.
Microsoft has briefly taken the lead over Apple as the most valuable company a handful of times since 2018, including in 2021 when concerns about COVID-driven supply chain shortages hit the iPhone maker's stock price.
Currently, Wall Street is more positive on Microsoft. The company has no "sell" rating and nearly 90% of the brokerages covering the company recommend buying the stock.
Apple has two "sell" ratings and only two-thirds of the analysts covering the company rate it a "buy".
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