Last Chance to get on the Bitcoin Train?

by JDH on October 23, 2021

There is no such thing as a “last chance” with Bitcoin.  It goes up, and down, then up again.  Here’s what we know for sure:

  • Bitcoin made an all-time high of just under $64,000 on April 14, 2021
  • Bitcoin then collapsed 56% over the next 69 days, trading down to under $29,000 on June 22, 2021.  It appeared that Bitcoin was done like dinner.
  • Bitcoin then staged a typical comeback, going up over 130% over 120 days to hit a new all-time high of over $67,000 on October 20, 2021.  A new high indicates that the cycle isn’t over, yet.
  • As of 6:00 am on Saturday, October 23, 2021, Bitcoin has declined approximately 10% in the two days since the new high was reached, having dropped back to around the $60,000 level.

Bitcoin goes up.  Bitcoin goes down.

The chart is instructive:

The blue horizontal lines show the new highs and local tops.  The $60,000 level acted as significant resistance.  Bitcoin touched $60,000 on May 10, and couldn’t get through that level, and that was it.  The “bear market” started, and it was 158 days before Bitcoin traded again at $60,000, on October 15.

The decline back to $60,000 may well be the pause that refreshes.

If Bitcoin had blown through $60,000 and rocketed up to $100,000 in a week or two, which it is easily capable of doing, that would have likely marked the end of the bull cycle.  A long consolidation and bear market would have followed.

But, because Bitcoin is pausing and digesting these gains, a further run to well over $100,000 is likely.

However, as the chart shows, a new high is followed by a correction (otherwise Bitcoin would now be trading at $10 million):

  • February: 7 day, 27% correction
  • March: 12 day, 19% correction
  • April: 11 day, 28% correction
  • May: as noted above, the local top on May 11 was followed with a 42-day decline of over 50%, and it was 158 days before Bitcoin returned to $60,000.

So how deep will this “correction” be?  I have no idea.  We’ve done two days and 10%, so if $60,000 holds, we are done.

A 10 day, 20% correction puts Bitcoin around $54,000 on October 31.  Happy Halloween.  Will it fall that far?  Again, I have no idea, but here’s my thought process:

A new futures ETF started trading this week, and did a billion dollars of volume in it’s first full day of trading.  As I described last week I don’t like futures-based ETFs, because they eventually erode to zero, and they make it easier to short Bitcoin.  However, it does put Bitcoin in the news, and does introduce new investors to it, so it likely increases the price in the short and medium term.

I continue to believe we will see $100,000 Bitcoin before the end of this year, so if you don’t own all of the Bitcoin you want, now is as good a buying opportunity as any.

Put in a market order, or get cute and put in limit orders down to $54,000 and see what happens.

Here in Canada, if you don’t want to custody coins yourself, QBTC and BTCC are good alternatives.

I’m big on ETH as well (QETH), as it is likely to outperform Bitcoin, but with higher risk, so we’ll discuss that at some point in the future.

For now, that’s the game plan.  Let’s see how it plays out.

As I write this on Saturday morning, October 16, 2021, it appears that the first U.S. Bitcoin ETF will begin trading in the next few days.  The ProShares Trust will be the issuer.  Of course, Canada already has crypto exchange-traded funds, including QBTC and QETH from 3iQ, and the Purpose Bitcoin ETF, so it’s nice to see the Americans finally catching up.

Is this good news?  On the surface, yes.  Many investors want exposure to crypto, but they don’t want the hassle of buying Bitcoin directly, on a crypto exchange and holding their own coins, so having access to an ETF makes it easy to invest in crypto.  More investors increase the price, so that’s good for everyone who already holds Bitcoin.

But, there is a problem.

The SEC appears sent to approve futures-based ETFs, not spot ETFs.  A futures-based ETF does not buy Bitcoin and hold it; they buy futures contracts.

Huh?

The Sprott Physical Uranium Trust buys actual uranium and holds it.  That’s how gold and silver ETFs work as well.  That’s how a stock ETF works.  If I want to invest in high-tech companies, I can buy a technology ETF, that actually owns technology shares.

Of course you can’t buy physical Bitcoin, because you can’t hold it in your hand, but you can buy spot Bitcoin, and hold the digital coins.

So why is the SEC approving futures-based ETFs, but not spot-based ETFs like we have in Canada?

Money.

The SEC does not exist to protect the small investor.  They exist to help the rich get richer.  Think about it:

With a spot ETF, the creator buys Bitcoin (or Ethereum, or whatever) and holds it.  They need to have adequate security protocols, but otherwise, it’s quite simple.  Set it and forget it.

With a futures ETF, the lawyers get paid to set up the ETF, the managers get paid to manage it (because futures expire so unlike Bitcoin itself which doesn’t expire, futures need to be rolled over and traded, so more work equals higher management fees).

But wait, there’s more!

The hedge funds now have an arbitrage opportunity.  Furtures contracts trade at either a premium or discount to spot, so the hedgies can buy/sell the futures and buy/sell the underlying asset, and make a profit on the difference.

This also encourages greater levels of market manipulation.  As we have observed in the “paper” gold market, traders can drive the price up and down to suit their needs.  That manipulation is more difficult when dealing in the underlying commodity.

If you were to ask the SEC why they are going the futures route they would say “the futures market is already regulated, Bitcoin isn’t, so it’s safer to offer futures based products.”  That’s silly.  In Canada we figured out how to regulate spot ETFs, so I’m sure the Americans could also figure it out, but they aren’t, because the Big Boyz can make more money with a futures-based system.

The problem is that futures do not exactly spot, and with the higher fees, investors will lose.

If I buy $1,000 worth of Bitcoin on a crypto exchange, I pay a tiny fee, but receive very close to $1,000 worth of Bitcoin.

If I invest $1,000 in a Bitcoin ETF, the fund manager gets a fee.  (For example, the Purpose Bitcoin ETF in Canada has a Management Expense Ratio of up to 1.5%).  So, every year, my $1,000 investment drops by $15 (assuming the underlying asset price remains the same).  But it’s not just the fee; there is a spread between the futures and the spot price, so the ETF does not exactly track the price of the underlying asset.

This means that if Bitcoin was worth $60,000 when I bought the ETF, and a year later it’s worth $100,000, it is unlikely that my shares in the ETF will be worth $100,000.  They will likely be worth at least $1,500 less (for the management fee), and likely even lower than that due to the imprecise futures tracking.

So am I saying you should not buy ETFs?

No, but I am saying you should consider your options.

If you want to invest in crypto in your RRSP or TFSA (or equivalent tax-advantaged product in the USA) then your only choice is to buy an ETF that is eligible for inclusion in an RRSP or TFSA.

If you are a big corporation or pension fund that is only permitted to invest in publically traded securities, again, you only have one choice.

If you don’t want the “hassle” of trading on a crypto exchange and taking custody of your coins, again, an ETF is a good option.

Custody of your coins

A word on trading and custody: to buy a stock, you click a button on your computer and you are done.  To trade crypto on an exchange, it’s more complicated.  You have to set up an account, which involves confirming your identity and other procedures.  If you are a corporation and you want to trade significant amounts, that will take time.  You then buy your coins, and to be safe, you should “self-custody.”  That means you have your own “wallet.”  You transfer your coins from the exchange to your wallet, which is then disconnected from the internet so it can’t be hacked.  You hold the private keys to the wallet.  “Not your keys, not your coins” as they say.  That is the safest and most secure option, but it is extra work, so I understand why many people don’t want to be bothered.

My hope is that futures ETFs are the first step, soon to be followed by spot ETFs, which will create significant demand for Bitcoin and other cryptos.

What’s next for Bitcoin?

As I write this Bitcoin is trading at $61,500 USD, very close to its all-time high of around $65,000 set in April.  I assume it is now in a zone of significant resistance, so a pullback to $55,000 or lower is likely before it makes the final push to a record high.

I continue to expect that Bitcoin will trade at $100,000 USD before the end of 2021, but it will be a bumpy ride.

So buy coins, or ETFs, or whatever strikes your fancy.

Bitcoin leads the charge.  It runs first.  Next will be the number two crypto, Ether, which will run over the next few months, so most of my new buying will go to Ether.  Once it has its run the speculators will start pumping the altcoins, but that is a very risky game, so only gamble with funds you are prepared to lose.

Those are my thoughts.  Q4 is generally good for Bitcoin, so enjoy the ride.

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