Barry Silbert can’t see into the future but he has a very clear idea how he’d like it to look – and it includes 401(k) investors.
“No one can say for sure where bitcoin will be in five years,” the founder of Digital Currency Group says. “There’s huge upside potential for bitcoin. It has the potential to completely disrupt the existing market on how money is transferred around the world, and potentially revolutionize how commerce gets done.”
Those should be more than familiar notions for anyone who’s heard Silbert talk about bitcoin. What’s far less so is his idea that bitcoin has a place in the defined contribution world.
Bitcoin, for the uninitiated, is a form of digital currency that emerged in 2009. According to Coindesk, an independent online journal covering the digital currency market, bitcoin’s most important characteristic is that the currency is decentralized. “No single institution controls the bitcoin network,” it notes.
That means transactions are conducted without banks, middlemen, or their fees.
Though Silbert is one of bitcoin’s leading evangelists, he’s not dismissive of what has been painfully obvious to investors in the digital currency around the world. “Investing in bitcoin is risky,” he said.
However widely bitcoin is — or isn’t — adopted in the next five years, one prediction may be a bit safer to make: retail investors are likely to soon have access to securities valued on the price of bitcoins, possibly as soon as the end of the year.
Wealthy, accredited investors already do. Silbert launched the Bitcoin Investment Trust in September of 2013. The trust invests exclusively in bitcoin. Shares in the trust — more than 1 million were outstanding at the beginning of October – are valued based on the daily movements of the currency. (They were trading in mid-$30s in the past week, far off their 52-week high of $110.)
A minimum investment of $25,000 is required to buy in. Some accredited investors have access to BIT shares through IRAs and self-directed brokerage windows in their 401(k) plans.
Silbert is trying to change that. In fact, he’d like to bring the option of investing in the BIT to all 401(k) investors.
The key to his vision rests in the hands of regulators, specifically the Financial Industry Regulatory Authority, which has hardly been a champion of virtual currencies.
In May, the regulator issued an investor alert, saying that speculating in bitcoins is “more than a bit risky.” The SEC and IRS soon after issued their own warnings. Also, several countries have imposed various bans on the virtual currency, while others are considering implementing them.
The well-publicized uncovering of bitcoin-backed ponzi schemes, and the bankruptcy of the Japanese-based Mt. Gox exchange — $425 million of customers money vanished into virtual thin air — created massive price volatility in bitcoins and led to heightened scrutiny from regulators, consumer groups and bankers around the globe.
Bitcoin trader Kolin Burges stands in protest outside an office building housing Mt. Gox in Tokyo. Bankrupt bitcoin exchange Mt. Gox said it found 200,000 bitcoins, which were previously thought stolen, in disused electronic wallets. Another 650,000 bitcoins remained unaccounted for earlier this year. (AP Photo/Shizuo Kambayashi, File).
Still, bitcoin’s reach is expanding, and the list of online and off-line retailers now accepting it as a currency seemingly grows by the day.
Ebay, Amazon and Paypal are among the adopters, not surprising given their tech-centric brands and histories of disrupting the markets they operate in. But bricks-and-mortar traditionalists like Sears, K-Mart, CVS and Subway also are recognizing the virtual currency.
Microsoft’s Bill Gates has been publicly supportive, while Virgin Airway founder Richard Branson is an investor in Blockchain, a virtual “wallet” that stores bitcoins.
Those guys have money to lose, of course. Today’s average 401(k) investor? Not so much – a point Silbert says he’s careful about.
“Even in dealing with accredited investors, we tell people to invest nothing more than they are willing to lose,” explained Silbert.
On the other hand, Silbert also knows how to make it sound appealing.
“For the average investor, the chance to make a small investment in bitcoin is to invest in a technology movement that has a chance to change the world the way names like Google and Ebay have,” he said.
Silbert noted a lot of people liken bitcoin, and its volatility, to a gold rush. He thinks it’s better than gold. “With bitcoin you can actually buy things. You can’t do that with gold.”
He and his team are trying to get the BIT Fund registered as a public security. If Finra signs off, BIT shares will be available to the public on an over-the-counter exchange. That could happen before Christmas.
Silbert thinks his fund’s public registration will help shed necessary light on the market for bitcoin and, he hopes, temper regulators’ fears.
“Every day that goes by where more widely recognized merchants are accepting bitcoins, more consumers are using them, and more regulators are looking at the market, the risk of investing in the currency goes down,” he said.
Regulators seem most concerned about the currency’s wild price volatility. It’s trading nowadays around $380 per bitcoin, down from its high of $1,147 in December of 2013.
While the bankruptcy of a major exchange, and news of central banks banning the currency fueled the swing, Silbert says the main reason for price volatility is the absence of a single, dominant exchange. Instead, there are a couple of hundred smaller exchanges dispersed around the globe.
“We’ve seen bitcoin go through a series of four bubbles and corrections,” said Silbert. “Right now the market is fragmented. But as dominant exchanges emerge, you can expect to see a lot more price stability.”
But first, there are those pesky regulatory matters to deal with. For instance, the New York Department of Financial Services launched a BitLicense initiative early this year, hoping to implement the type of regulations that can protect the public from another Mt. Gox meltdown.
Last month, the regulatory agency proposed that companies doing business with digital currencies be required to submit fingerprints and headshots to the state.
Critics of the proposed regulation — typically bitcoin software startups located in New York — claim the regulations are too onerous and expensive and will drive bitcoin entrepreneurs from the state. Other bitcoin advocates claim the proposed regulations raise civil liberties concerns.
Photo: Balloons bearing the bitcoin logo float above the floor at the Inside Bitcoins conference and trade show in April in New York. The balloons are part of a promotional effort by London-based Cloud Hashing, a bitcoin mining company. (AP Photo/Mark Lennihan)
None of this, according to Silbert, is deterring RIAs, plan sponsors and their investment teams from inquiring about bitcoin as a potential investment vehicle.
“RIAs are telling us that more investors are inquiring about bitcoin. As is, RIAs have no platform to invest in the currency. The BIT gives them the platform they can deliver to clients to securely invest in bitcoin. Investors don’t have to go out and mine for the currency and hold it themselves. That’s what the trust does. It gives them secure access.”
To be clear, Silbert says plan sponsors have yet to open their doors. But, he says, at a recent Barclay’s Payment Conference, he fielded inquires from the investment teams of more than 20 plan sponsors.
“It hasn’t turned into investment dollars yet, but we’re seeing a lot of curiosity from the institutional side.”
Presuming Finra agrees to registers the BIT (it is applying to have a place on the OTCQX exchange), it’s unclear how the fund may show up as an option in a 401(k) menu. It likely would have to be a part of an emerging-tech specific mutual fund. Participants with access to a self-directed brokerage window through their plans could conceivably have access.
How eager sponsors might be to open those windows is the big question facing Silbert.