What Is The Current Situation With Bitcoin?
Bitcoin (BTC-USD) has traded in a range for the past few months, but in the crypto world, you’re never far removed from some excitement.
For one, Miami Beach hosted the Bitcoin 2022 conference in April. With over 25,000 people attending in person, the conference was more than twice the size of last year–featuring a 1.5-ton bull sculpture, a Steve Aoki concert, and people selling yacht timeshares.
Peter Thiel called Warren Buffett a “sociopathic grandpa from Omaha” during his speech, which surely gave financial news sites plenty of clicks in the days after. Buffett, for his part, said he wouldn’t trade 25 dollars for all the Bitcoin in the world at Berkshire’s annual meeting this weekend.
But behind the conspiracy theories and goofiness, there’s a fundamental promise, which is that each of the 7+ billion people in the world can put their savings in a currency that isn’t controlled by a central bank, and thus cannot be inflated away. Sure, Bitcoin can be taxed, but taxes get a lot of attention from voters while printing money is easier and poorly understood, making printing the tactic of choice for governments looking to raise money. There are issues with Bitcoin that need to be resolved at some point, the prime example being making sure miners aren’t wasting tons of electricity, but there has been slow but steady progress along those lines.
The most important thing going on with Bitcoin in my opinion actually has nothing to do with any of this. It’s actually an obscure push by the Grayscale Bitcoin Trust (OTC:GBTC) to convert from a closed-end fund to an ETF, allowing ordinary investors to get a cheap and effective way to own Bitcoin with a few clicks of a mouse.
What Is The Grayscale Bitcoin Conversion?
Essentially, Grayscale is trying to get the government’s permission to convert GBTC to an open-ended ETF. As of Friday’s close, GBTC had a net asset value of $35.46 per share, while the market price is only $26.38. This is a significant discount to the underlying assets, and the conversion would provide the legal mechanism to allow GBTC to arbitrage this, driving the market price up until it equaled the net asset value (more explanation here). Essentially, if you think this case will resolve in GBTC’s favor in the next few months, you can make a 34.4% return on investment. This sounds high and it is, but remember that crypto is far less efficient than traditional sectors of the financial markets, so stuff like this happens all the time as traditional players who do arbitrage aren’t allowed to touch it.
So GBTC filed an application with the SEC to effect this. The SEC didn’t say yes, but they didn’t say no either and asked for more time. They also asked the American public to write in with their thoughts, and about 2700 interested people wrote in (you can read my letter to them here). There have been some interesting legal twists and turns that have been helpful to Grayscale’s case in the meantime, and the discount hasn’t budged too much, despite buying by Morgan Stanley and Grayscale itself. The deadline for the government decision is July 6, at which point the SEC either has to make a decision. Grayscale indicated to Bloomberg that they would likely take additional legal action if the ETF is not approved by then.
I think that this is going to be approved. I could be wrong, but it would significantly broaden the pool of people who could get efficient access to Bitcoin and would avoid some of the highly publicized issues with people getting their BTC lost or stolen. We’ll see. This also should support the price of BTC in the long run as people who previously have not owned Bitcoin because it’s too complicated to do so can buy in.
It’s no secret that I’m bearish on the market right now, but GBTC is one of those special situations that can make money even if the market goes down. Bitcoin probably wouldn’t rise if the market drops a bunch, but 34% is a decent cushion. Also worth a look are Twitter (TWTR), trading below its acquisition price, and Activision Blizzard (ATVI). If all three deals close (my guess is that they all will eventually), you can earn a nice return from each even if the stock market goes down.
Is Bitcoin Safe Now?
Bitcoin and safe generally don’t go in the same sentence, but the Grayscale Bitcoin Trust is probably the safest way to own Bitcoin. If this conversion is approved, you get a 34% kicker on your Bitcoin investment. Grayscale does charge a 2% annual management fee, but I would expect this to come down over time, especially if the government allows competing ETFs to come onto the market (this is likely if GBTC is approved for ETF conversion). At some point, I think we’re going to get a Bitcoin ETF with a 50 bps annual fee or less, at which point investors should happily be able to get crypto exposure without paying excessive fees.
It bears noting that Bitcoin is a risk asset now (and definitely not a safe haven asset) because it is so widely owned. This means that if the stock market tanks, I don’t think Bitcoin would rise, but at some point in the next couple of years, I think BTC could decouple from the NASDAQ in the face of rising adoption of cryptocurrency.
Other Bitcoin catalysts to watch:
- Regulatory acceptance. The Republic of Panamá passed a bill broadening the use of Bitcoin and allowing Bitcoin to be used as legal tender with the government. El Salvador already made headlines for its foray into Bitcoin as well, albeit both positive and negative. The idea of small countries experimenting with Bitcoin is not brand new, but the process allows for use cases to be found by trial and error and helps familiarize middle-class people in more and more countries with the potential for BTC.
- Tether (USDT-USD). The Fed is raising rates, and financial conditions are starting to tighten. If one or more stablecoins see a run on the bank, this could be a big issue. Tether now has over $83 billion in liabilities (and reporters have repeatedly questioned the potential liquidity and solvency of its asset) so any panic in that or another currency could trigger a big selloff in crypto. If this were to happen, I would regard it as a buying opportunity for BTC. Tether is far from the only stablecoin with a lot of questions being asked, but it is the largest.
- Bitcoin halving. While not set until 2024, Bitcoin’s inflation from miners (now under 2%) will effectively come to halt with the next halving in 2024. I’m optimistic that the Fed truly will bring inflation down after pivoting its stance, but with BTC’s halving, inflation in the coin will be under 1%, on par with the most safe-haven of currencies. While volatility will take time to come down, I think you have to like the long-term prospects of BTC here with acceptance increasing, volatility slowly dropping, and disinflation. The short term could be influenced heavily by other areas of crypto or the NASDAQ (QQQ) but in the long run, Bitcoin should be a great store of value.
Is Bitcoin a Buy, Sell, or Hold?
At this exact moment that Bitcoin is a hold due to the downward momentum of stock in general. I don’t know if I would put much new money to work unless the price of BTC were to pull back further. GBTC however, I would say is a buy because of the special situation with the ETF conversion. 34% is a lot of cushion, and your downside is at least somewhat limited by the book value of the fund. The conversion truly should be a matter of “when” and not “if,” offering a nice way to make a profit for patient investors.