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.