Bitcoin – What’s Really Going On

by JDH on November 28, 2020

Bitcoin was trading at $3,825 on march 13.  On November 25 it traded at just under $19,500.  It then “crashed” to $16,225 the next day.  And so it is with Bitcoin.

Is Bitcoin a scam?  A Ponzi Scheme?

Perhaps.

Is the US Dollar a Ponzi Scheme?

Perhaps.

But that’s not the point.  If people believe something has value, it does, until it doesn’t.

Of interest for the purpose of these discussions is GBTC – Grayscale Bitcoin Trust, and interesting “investment” vehicle that issues new shares every day in exchange for cash or Bitcoin.  The shares are issued at the Net Asset Value, but you can’t sell those shares for 6 months.  Unlike a typical mutual fund or investment trust that can buy and sell securities, GBTC never sells Bitcoin, except to pay management fees.  Bitcoin goes in, but never goes out.  There’s an interesting article on this Reflexive Ponzi Scheme here.

Of interest for our purposes is that GBTC typically trades at a significant premium to Net Asset Value (somewhere between a 19% and 26% premium).  Why would you pay a premium to buy something that holds Bitcoins when you could just buy Bitcoin for 25% less?

Laziness.

Buying Bitcoin is cumbersome.  You have to get fiat money, like US dollars, loaded onto an exchange, and then buy Bitcoin, and then move your bitcoin to a secure wallet (because if the exchange gets hacked you lose your Bitcoin), and then when you want to sell it you have to reverse the process.

That’s cumbersome.

With GBTC you just buy it through your broker, like you do with any other stock.

Easy.

But it’s not just laziness.

What if you are a hedge fund, or an institutional investor, and you want exposure to bitcoin (the best performing asset this year).  Do you want to arrange for hardware wallets and cold storage?  Nope.  GBTC makes it easy.  (You could also buy Bitcoin futures; that’s your other choice).

So what are the Big Boyz doing?

They buy GBTC in the daily offering, and then immediately short GBTC.  Six months later your stock becomes free trading and you sell it to cover your short.  Since you paid NAV, and your stock will be worth more than NAV, you make a profit.

(And yes, I get it, the trade can go against you, and there are margin fees, but still, the Big Boyz know how to mitigate the risk).

So what’s my point?

Lots of Big Boyz understand this, so they are doing the trade, which involves buying GBTC, which drives up the price of Bitcoin.

And it will likely keep driving it up.

What else are you going to buy?

Gold?

Gold is now below $1,800 an ounce, so it’s not looking like a great investment today (but I think it will look a lot better in a few months).

So GBTC is pushing bitcoin higher.

Govern yourself accordingly.

(And no, for the record, I am not a big bitcoin “investor”).

More next week.

Nothing More to Add

by JDH on November 21, 2020

I have nothing more to say this week.  I’ve said it all before.

A few weeks ago I talked about being in a Holding Zone, and last week I talked about the possible Rise Before the Fall, and those comments are still valid.

We are in a period of huge uncertainty.

The election results are uncertain.  I still think Trump will win, but with each passing day I am looking increasingly wrong, but until that situation is resolved we will bump along.

The fourth quarter is traditionally a good time to buy gold, in anticipation of its first quarter rise, so I’m watching that.

For now, my plan is to have as much cash is possible, because in times of uncertainty, cash is good.

Beyond that, I have nothing to add; we’ll see if I have any brilliant thoughts next week.

The Rise Before the Fall?

November 14, 2020

There comes a point in time where you look at the markets and say: “this is crazy”. Here in Ontario, Canada, where many businesses have been in “work from home” mode for 8 months, COVID cases are at record levels: 1,400 a day, as compared to under 600 during the peak in April.  Clearly April […]

Read the full article →

Wrong, But Still a Big Win

November 7, 2020

Last week I explained how to bet on a Trump win, based on my assumption that Trump would win the election, easily.  Needless to say, there was no landslide win for either side.  As I write this, there was no win for anyone, yet.  However, it was still a very profitable week.  Here’s the play […]

Read the full article →

How to Bet on a Trump Win

October 31, 2020

As I described last week, I expect Trump to win the election on November 3.  I don’t expect it to be close.  I expect that by the morning of November 4 it will be an obvious landslide victory, regardless of how many mail in ballots have yet to be counted.  The average American thinks they […]

Read the full article →

Holding Zone

October 24, 2020

I have nothing to report this week, because nothing happened this week.  Perhaps next week will be more eventful. There was a presidential debate, which I didn’t watch, but based on the reaction I read on Twitter, which I assume is completely accurate, President Trump will win an easy re-election.  My prediction: 310 electoral college […]

Read the full article →

Amazon, Gold, and the Charts

October 17, 2020

Today, for fun, let’s review the charts. Let’s start with a stock we don’t regularly follow here: Amazon.  The one month chart is interesting. Interesting in that on Friday, at 10:30 in the morning, AMZN was trading at $3,399.66, but couldn’t quite make it to the psychologically interesting but otherwise unimportant level of $3,400. At […]

Read the full article →

Time to Deploy Capital in Gold?

October 10, 2020

Last week I said Keep Your Powder Dry.  I also said this: I assume that by Canadian Thanksgiving he will be back in the White House, on the road to recovery, and he will be able to say “this was serious, I should have been more careful, but even for a 74 year old obese […]

Read the full article →

Keep Your Powder Dry

October 3, 2020

I have no idea what it means to “keep your powder dry”.  Gun powder, I assume, because if it’s wet it won’t ignite?  Baby powder, because there’s no point in putting wet powder on a baby?  Two different images, same implications. My operating thesis is this: Trump wins the election in November, probably by a […]

Read the full article →

Where are we at?

September 26, 2020

I have no idea where we are at. I know that the price of gold is about where it was back in July, around $1,862 an ounce, which is a lot lower than the $2,000 at ounce we exceeded on August 6.  It’s been all down hill since then. Why? I have no idea. Profit […]

Read the full article →