Most investors will remember 2004 as the year Facebook was launched. Mark Zuckerberg was then an 19-year-old Harvard student. He launched the website partly as a dating site. Zuckerberg was better at coding than courtship. He invested US$5,000 in the venture.
Facebook has powered more dates than Zuckerberg ever imagined. It went public in 2012. Now renamed as Meta, it is worth a shade under US$1 trillion ($1.33 trillion) in market cap.
However, 2004 should be remembered for a much more significant anniversary. On Nov 16 that year, the first gold ETF was launched. Gold had been traded for over 6,000 years. The ancient Egyptians used it as dowry. But, investors could only get exposure to gold by buying physical gold. This means that one had to hold on to coins, bars and gold certificates.
Facebook made it easier to connect with old and future friends. You needed someone’s phone number or email to keep in contact before Facebook appeared. Over two billion people are now on it. Facebook is the gold standard for social media with its feeds and photos.
Similarly, the gold ETF was revolutionary. It made it easier to buy and sell gold with a single click. Gold trading became a mainstream activity for retail investors. It removed the nuisance of insuring, shipping and holding gold. An ancient commodity took on a modern guise.
The ETF was called the SPDR Gold Trust ETF. It is known by the acronym GLD. It amassed US$1 billion in 72 hours. Today, its assets are nearly 60 times the level in 2004. There are many other gold ETFs now. But, the pioneering ETF is the largest and most famous.
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Gold price has been turbocharged with the ETF. Gold has risen 4.5-fold since the launch. This is an annual return of 7%, which is superior to that of the S&P 500 in capital gain terms.
This week may mark a similar watershed moment for Bitcoin. On Jan 10, the SEC approved the first Bitcoin ETFs. There are 11 ETFs that the regulator has sanctioned. They include household names such as BlackRock, Wellington and Fidelity. The asset managers that have been approved have a combined AUM of over US$15 trillion. It means that Bitcoin trading could go mainstream through the vast distribution network of these giants.
Bitcoin has been around for 15 years, which is a lot shorter than gold’s lineage. However, gold and Bitcoin are similar. Bitcoin is the hightech version of the precious metal. Both gold and Bitcoin are stores of value that are independent of central bankers. Central bankers can print money to devalue currencies. In fact, one-fourth of the US dollars in circulation today have been printed after Covid. It is no wonder that Bitcoin is up four-fold since the Fed’s printing press went into overdrive.
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Neither gold nor Bitcoin provide income. You do not receive interest from holding either asset. This means both gold and bitcoin tend to do badly when interest rates rise. Bitcoin’s debacle in 2022 was linked to the interest rate hikes. Its rally in 2023 was partly on the expectation of rates falling.
Another commonality is that gold and bitcoin are uncorrelated with the stock market. The assets are not only inflation hedges. They provide diversification.
With the Bitcoin ETF, it is now a lot easier to spread one’s risk. Bitcoin and gold have their detractors. But even the detractors would recognise the value of not playing with just a single asset class. You can improve your returns through diversification.
The approved ETFs are now cutting their fees. In the last few weeks, there has been a race to the bottom. The players want to popularise the asset class by cutting fees. BlackRock cut its fees by more than half. The fees range from 0.2% to 1.5%. Investors would be more enticed by the liquidity offered by the ETFs rather than the fees. We expect intense competition in marketing these instruments.
Standard Chartered says that ETFs could draw up to US$100 billion in assets in 2024. It notes that Bitcoin might double on the back of it. If so, it would be even stronger than GLD’s launch two decades ago. Gold is now easy to trade. Bitcoin could be more accessible 20 years from now.
Nirgunan Tiruchelvam is head of consumer and internet at Aletheia Capital and author of Investing in the Covid Era. He does not hold any position in the stocks mentioned in this column. This column does not constitute investment advice of any kind
