Here is some ’empirical data’ showing that tx fees do not hurt/slow Bitcoin adoption pic.twitter.com/zrLVDLcnf4
— Alistair Milne (@alistairmilne) August 25, 2017
From seeking alpha comes this gem about GBTC the Bitcoin ETF. The author acknowledges the extreme premium in which the ETF trades over the Bitcoin price. In other words if you buy GBTC you are currently paying >80% or more than just buying Bitcoin. (see more here)
First, he claims that “buying directly through coinbase has a +40% premium”. I don’t know why and he doesnt support his claim in the article. Yes, coinbase charges a fee, but it is not where near 40%.
He offers that GBTC offers cold storage through Xapo, and Coinbase offers insurnace but it comes with astericks – see authors article here.
Ok, so lets say that GBTC is more secure for storage of Bitcoin over Coinbase. The author ignores the fact that most responsible crypto owners get a hardware wallet or some other “off exchange” wallet. This fact doesnt help justify the massive premium you’re paying for GBTC.
Finally there is this, the author presents an argument by a GBTC investor:
“I’ve decided to go with GBTC as a way of safely getting exposure to Bitcoin via my brokerage account, because I’m VERY long on it, and I can easily liquidate high dollar amounts (over $10K) at any time I want. And it’s all on the up-and-up, easily trackable for tax purposes, which I care about. My thesis is that the current premium is less important to me than the exposure because it’s 41% (or whatever the current percentage is) of a small fraction of what the ultimate price of bitcoin will be 10 years from now. It’s not perfect, I acknowledge that, but it strikes me as my best option, especially if I’m viewing this as one of my high-risk, high-reward investments.”
The argument is that in 10 years, the GBTC premium will be irrelevant. Of course, this leaves out he problem of P/E compression, or the potential catastrophic failure of Bitcoin in general. But, this line of thinking is congruent with the thinking of a Bitcoin bull. This isn’t “blind” investing or totally ignorant. I can respect part of this.
This completely ignores the fact that there are at least two other proposed Bitcoin ETF’s with the SEC. Care to bet that in 10 years there will be even more? Whats going to happen to the GBTC premium when other ETF’s come out which dont trade a premium?
INVESTORS WILL GO TO THOSE OTHER ETFS, THEREBY ZAPPING THE PRICE OF GBTC. If you’re ETF currently trades at an 81% premium to Bitcoin, and that premium erodes to zero – thats a loss.
I think you lose holding GBTC, there really is no way around it.
It seems clear that the US government is making the case for Bitcoin regulation. It seems they’ve kept it in their periphery, but as of late they are more dialed in. Government headlines are coming “fast and furious” as of late. They probably figure that they will float ideas and statements out to the public to prepare everyone.
- First, we had the CFTC approve of the Bitcoin exchange.
- Then we had the SEC come out and rule ICO’s as securities, therefore they fall under SEC jurisdiction.
- Then Mnuchin just said a few minutes ago that hes “concerned about bitcoin being used for illicit activity.”
So they point the finger at some possible shenanignas, make a move on some bad guys and say “See, we told you so! Now we’re coming to clean it up!”
Regulation and government intrusion is sure to make many “purists” in the crypto community upset. These are the guys who fled to bitcoin to flee their oppressors.
But for regular investors I think the regulation further paves the way for larger investments from Wall st and the like.
Yesterday we mentioned some interesting moves that seemed in sync from the US stock market and Bitcoin/Ethereum.Today was another curious move.
The chart below shows a good move up in the S&P500 (an Index of the US stock market) and Ethereum. Both moves occured right in the 10:11-10:12AM EST time frame. The top chart is Ethereum from GDAX and the bottom is the S&P500 (SPX).
Clearly there are good sized traders out treating Ethereum and Bitcoin as an asset class like equities…
Its more than apparent that hedge funds and banks are pushing into the Bitcoin and crypto markets. Today I noticed that both Bitcoin and Ethereum prices gapped up at 9:30AM EST. Coincidentally thats when the US stock markets open for trading. Forgive the terrible notation in the GDAX charts below, I was in a rush.
There is no obvious reason why the two would be linked, I suspect it has something more to do with some traders who have algorithms for the US stock markets. When their machines flip on they also have Bitcoin and Ethereum in their portfolios, so they begin trading them, too.
I don’t currently have the time to backtest this, but I wanted to post something as a reminder.
Todays Bitcoin and Ethereum bloodbath was more or less expected ahead of the (potential) coming Bitcoin “Segwit” event. While this is causing major moves in the short term I think its prescient to remind the cryptocurrency community that Wall Street is on its way. In the past we posted about what some of the roadblocks are, but with todays Bitcoin and cryptocurrency bloodbath we thought maybe some positive predictions were due.
Yesterday we posted some concrete evidence, but there are some other speculative indicators.
First, trading in “traditional” (stocks, options, bonds, etc) Wall Street products is flat, at best. There is nothing indicating that those traditional volumes will pick up either. (See JPM trading revenues, weak). [Note, other areas of banking appear to be strong – I am referencing the trading sector specifically]
Take a look at US stock and options volume for example. Yes, there is some deviation month to month but its been flat for years.
Its no secret that Hedge Funds are having a hard time. They are a major source of banks trading revenue. Why, well multiple studies show that buying and holding over time crushes Hedge Fund performance. Vanguard is the poster child of this, and is growing at a ridiculous pace offering investors low cost ETFs. Whats my point? This is good for investors but terrible for Hedge Funds and Banks.
Trading desks on Wall Street need a new revenue source. Enter Bitcoin, Ethereum and cryptocurrencies.
All of this is could be brand new business in a market that is expanding rapidly.
Crypto Volume is Exploding
High volumes mean dollar signs for brokers. All evidence points to volumes that rival US Stock Exchange volume.
Below is Bitcoin 7 day average volume. I’d suspect most would argue that this volume will continue to grow over time – if not in Bitcoin than certainly in other cryptocurrencies such as Ethereum or Dash.
Just a few days options trading in Bitcoin was approved by the CFTC (US Commodities Futures Trading Commission). This means that regulators are starting to turn positively on Bitcoin and crypto. This is great news for banks in particular as they can more easily move into cryptocurrencies when the regulators are approving.
This offers opportunities not just in trading – but in services for trading:
- Cryptocurrency clearing and storage
- Research and Analysis
- “Smart Routing” and algorithmic trading
It would be easy to argue that as more large entities enter the space, more technology is built and more capital flows in. While today Bitcoin prices are getting hammered, we’re in the first inning of a game that most likely will not end in our lifetimes. Reminder: this isn’t investment advice, just an offering of perspective.
Initial Coin Offerings (ICO’s) are raising hundreds of millions of dollars on pretty much hopes and dreams, using an Ethereum platform which is in its infancy. (Some ICO sales even jammed up the Ethereum network). I say hopes and dreams because despite raising mounds of cash they aren’t near releasing product. Seriously, here are just a few:
- Tezos currently raised >$200 million, and the funding isn’t over yet
- Bancor raised $153 million
- Block.one / EOS raised $185 million
That is staggering.
How Initial Coin Offerings Hurt the Ethereum Price
Raising “cash” isn’t really the right word. They’ve raised heaps of Ether, which they need to sell in order to get cash. What does this mean? You have hundreds of millions of dollars in Ether either being sold, or potentially being sold. Its quite possible these companies only sell portions of their holdings, or even none at all. However, these companies need to use the funds to hire developers, buy computers, or just take exotic vacations. (Remember, there are no regulations in ICO land.) Its therefore a reasonable assumption that there is a good amount of Ethereum supply created from this.
The ICO’s need to start adding actual value to the ethereum network. They need to provide a service thats good enough to bring new people into Ethereum. This would raise demand for Ethereum and should raise the price. As of now this is all just a transfer of wealth from existing ETH holders to various “start ups”, with the hope that value is created at some point in the future.
For sake of argument, lets just say that all of the funds will be used for legitimate business purposes. Again, they need to sell Ether to get cash to buy stuff or hire people. This means you have many sellers that have a desire to get out, for which Ethereum needs aggressive buyers. If the sellers are more aggressive than the buyers, you get a price drop.
If you use google trends as a proxy for Ethereum demand, well, you can see why the price is currently ~$250 down from $400 a few weeks ago.
Notice a trend? Both peaked in June 2017. What about the Ethereum price? Peaked in late May…just before the huge ICO month in June. I can’t say for certain that the two are related, but I’d speculate there is some correlation for good reason.
Short Term Ethereum Price Forecast
First, Ill state I have no clue where ethereum prices are going. I also own ethereum. Also, the short term picture is different from long term. Long term I have high hopes, but this is about the next few months.
- Hundreds of millions of dollars of supply
- Waning public interest
- There is also the Bitcoin fork – which if it goes wrong could create selling in not just Bitcoin but all cryptos.
Where does this leave us? Hard to paint a pretty picture there. With more ICO’s coming daily there will be more ETH supply from companies needing cash. Eventually one of these will turn out to be a “killer app” or at least an app that maims. This would draw actual users to Ethereum, as opposed to speculators. Who knows when this will happen, but I suspect within the next year well see the technology start to move up towards the hype. This would in theory bring in new capital and get the Ethereum price moving in the right direction again.
While the SEC messes around trying to rule on the Winklevoss Bitcoin ETF (ticker:COIN) they are ignoring the riduclous premiums in the Bitcoin ETNs. The Bitcoin Investment Trust (ticker: GBTC) from Greyscale trades in the USA and XBT which trades in Europe. XBT just broke $100 million in assets and works with XAPO for cold storage.
This is just my opinion, but:
DO NOT BUY BITCOIN ETN’s
Lets focus on GBTC for sake of argument.
Current Bitcoin prices are ~$2,514
GBTC trades at ~$388/share
1,868,700 GBTC shares outstanding * 0.09273259BTC/share = ~173,289 Bitcoins in holding
$388/share GTBC * 1,868,700 GBTC shares = market cap value: $725,055,600
$725,055,600 mkt cap/173,289 Bitcoins = ~$4,184/bitcoin
Therefore, if you buy 1 share of GBTC at 388, you are paying ~$41 for ~$23 worth of Bitcoin. Thats an absolutely absurd >150% premium. Not to mention the 2% annual fee GBTC charges.
This premium is not the GBTC’s fault. Its investors that need their heads checked. GBTC cannot reweight their Bitcoin holdings in anywhere near real time. The Winklevoss ETF, should it make it through the SEC, would reweight much more often giving investors a vehicle which more closely tracks the actual price of Bitcoin.
August 1st is when the fun begins in Bitcoin. “BIP148” (aka “User Activated Soft Fork” dubbed UASF) is activated and the world finds out whether Bitcoin stays together or splits in two. If this is unfamiliar to you, then read here, or here or just give “SegWit” a googling. Avoid trying to research this on twitter, because you will find little outside of ad-hominem attacks between groups who cant agree on the best way to scale bitcoin. While I only have a peripheral understanding of the arguments what I do understand is that there is a real possibility of any of the following:
- The majority gets together and Bitcoin moves forward intact
- Bitcoin splits in two
- Bitcoin splits in two…hundred.
Why is there so much Bitcoin infighting?
I think it boils down to how much money is involved now. Bitcoin mining generates roughly $4million/day (1,700 bitcoins mined per day * $2,500/bitcoin). Thats big money. Money is a leading cause of divorce, and it appears thats whats ahead for Bitcoin.
How Does a Fork Impact Bitcoins Price?
At a minimum we will see Bitcoin transactions slow a great deal starting on August 1st. The Bitcoin community has argued about this for months, and it seems that even if Bitcoin does not fork there is a significant number of people who won’t go quietly into the night. If you hold Bitcoin today and there is a fork, you’ll likely end up with two new “types” of Bitcoin in your wallet (this happens automatically).
Ethereum went through a fork not too long ago, and it was pretty seamless. If you had Ethereum in your wallet, the next day you woke up to both the “new” ethereum and the “old” ethereum in your wallet.
Certainly Bitcoin splitting would hurt the price, at least initially. Regardless of outcome party lines are so split that it’s hard to envision smooth sailing over the next few months. Who knows which version of Bitcoin to bet on? The general public is just warming up to Bitcoin and crypto – and know there will be several versions? Picture logging into your Coinbase account, ready to buy bitcoin for the first time. Surprise! There are now two versions. Which do you chose?
To me, this paints an ugly short term picture. I think this could hurt or at least keep a lid on Bitcoin prices for the short term.
How to you Hedge the Bitcoin Fork?
- Keep holding you Bitcoin and come back in 6 months. Its quite possible the fork produces two (or more!) versions of Bitcoin which both attract investment and you will have equally or more crypto value in a few months. Or, one of the two versions rockets ahead in price. No one knows whats on the other side of this forking.
- Move to cash. Bitcoins had a nice run…let the dust settle then figure out where to allocate your funds. (Side note, I’ve heard Tether can help here but have not investigated).
- Other Crypto: More below:
There are some very viable alternatives to Bitcoin, that are more or less copies of Bitcoins code. Many don’t realize that you can simply copy bitcoins current code, paste it into a distinct infrastructure and, voila, you have your own cryptocurrency. While this is indeed a massive oversimplification, the point is while two groups are hell bent on controlling the future of bitcoin, others are taking what they love about Bitcoin, making a few tweaks, and providing a cohesive alternative. Cohesive meaning the people with skin in the game aren’t at each others throats.
I chose the two below because they already have a fairly substantial market cap and existing mining hardware for bitcoin could flip to mine these other currencies. Bitcoin mining hardware isn’t “fungible” to all cryptocurrencies. Bitcoin mining hardware cant mine Ethereum for example.
This detail about mining is important. If you run a large mining operation you can’t simple close up shop because you think Bitcoins future is destroyed. There are bills to pay. You can however move to an alternative currency and I suspect most of these guys have fork contingency plans in place. Note that you could write dissertations on each currency. So, do some homework before investing.
My best bets to pickup Bitcoin market share?
- Dash – Has a voting system in place (which resolves issues like forking quickly) and a unique structure to help fund future development.
- Litecoin – Widely available its probably more accessible to new investors (at the time of this writing). Coinbase for example has Litecoin, but not dash. Litecoin’s sales pitch is essentially that its network is lighter and faster that Bitcoin.
It’s very hard to say what the best play is – what makes this so murky is the political split between Bitcoin factions. To me this is what makes investing in other currencies such an attractive idea.
After the Bitcoin Fork
Six months from now the dust should be settling and the crypto landscape will definitely look different. Its hard to remember that just a few years ago none of this existed and now its a multi billion dollar industry. Remember, regardless of what happens with the Bitcoin fork there are incredible developments ahead. 10 years from know this will all be just a blip on the radar – maybe that means there is no wrong way to play it.
Why Is Wall Street Slow to Move into Crypto?
Not the sexiest topics, so we’ll keep it short.
Hedge funds and Wall Street firms have been slow moving into trading and investing in cryptocurrencies such as Ethereum and Bitcoin. There are some
indicators that sentiment is shifting such as JP Morgan (and others) joining the Enterprise Ethereum Alliance and Goldman Sachs initiating research coverage of Bitcoin.
Assume for a second that sentiment is suddenly 100% positive and that all the “scam” and “crime” stigma has left the building. So, whats the problem?
Regulation of Bitcoin, Ethereum
Party of the beauty and attraction of crypto is the decentralization and lack of regulation. There are many reasons why this is beneficial. But if you’re a big bank or managing billions of dollars, regulation matters. First, Bitcoin is not “legal” in all countries. Just look at what China did a few months ago when they started “regulating” Bitcoin. As per wikipedia: “While private parties can hold and trade bitcoins in China, regulation prohibits financial firms like banks from doing the same.” Not only is there (outside) risk of the US doing this, but if you’re a fund thats has Chinese investors or does business with China this clouds the water.
Most assets are also considered collateral. If I have $10 million in gold I can bet that the bank I deal with would consider that an asset against which I can borrow. Does every bank see Bitcoin in that same light?
What about tax treatment – the IRS has made some comments but I’d say nothing is set in stone. Just this month the IRS is talking to Congress about strategy.
A lower risk, but still foreseeable is the risks of regulators such as the SEC or FINRA coming after you for engaging in (for example) an investment used to launder money. Maybe you buy Monero and build up a large position and
those assets are seized because the FBI thinks they were used in some hacking blackmail scheme. Probable? Probably not. Possible? Sure.
The facts are that until a regulator “green lights” Bitcoin and/or Ethereum its going to be tough for large institutions to trade or invest.
When Might Regulators Weigh In?
I’ve been watching the SEC’s ruling on the Winklevoss Bitcoin ETF launch. Its taken years for a ruling, and earlier this year it was initially rejected. However in April the SEC decided to take another look. I think its a bit underestimated the impact that approval would have to the price of Bitcoin. This would give not only a regulatory stamp of approval, but paves the way towards clearing and settlement of Bitcoin at an institutional level.
Clearing and Settlement is a Major Problem
Take stock or ETF trading as an example. When funds (or anyone as a generalization) trade publicly listed stock that stock clears through a central clearing house called the DTC. If I am a hedge fund and have my assets at say, Goldman Sachs (your “prime broker”), I can trade stock with JP Morgan. JPM sends the stock to my account at Goldman through the DTC. Its a pretty seamless process and universal to US stock trading.
Now, lets say I’m a hedge fund and I want to buy $1 million Bitcoin. Buying is easy enough – you go to one of the exchanges, wire money and buy your Bitcoin. The problem is there is no way to get your Bitcoin back to your prime broker. No, a wallet even with vaulted cold storage wouldn’t work. The risks associated with that are high, but the mechanics of trading in and out are a huge hindrance. If the fund needs to immediately raise assets by selling Bitcoin they need to have immediate access to those coins. While yes, you can work out the mechanics if you are a small fund or “crypto” is your dedicated business. But for large institutions who want to simply invest in crypto this is a major hindrance.
How Could Clearing Change?
One possible way is for clearing houses/prime brokers like Goldman or Morgan Stanley to have some type of central clearing wallet. Linked to that wallet would be “sub-wallets” for each fund that owns Bitcoin. Therefore if I go to Gemini Exchange and buy 1000 Bitcoin, I tell Gemini to send that Bitcoin to Morgan Stanley on my behalf. Morgan Stanley then has custody and can allocate the Bitcoin to my funds sub-wallet. This “sub-wallet” concept seems to peripherally exist and I’d imagine banks could pay someone to hash it out rather quickly.
If the Bitcoin ETF launched this would circumvent all of this, because you could just buy the ETF and it would clear via the DTC like all other stocks and ETFs. (Yes, I am aware the GBTC exists, but the premium on that product is absurd). To this point I think this clearing/custodial aspect is probably one of the problems the SEC is having with the product.
In the End
I’m confident these issues will be worked out. The fact that they haven’t yet makes (in my opinion) Bitcoin and Ethereum such an interesting investment at the moment. The door is currently cracked open to big investors, but eventually we could see a real flood of assets.