“What happens if the government makes bitcoin illegal?” is a question you will frequently hear.
The assumption – the same that prohibitionists made in the early part of the last century – is that usage will decrease, or even stop altogether, if you make something illegal.
Not necessarily so.
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On 24 September, China issued two documents. One outlawed cryptocurrency mining, the other declared all cryptocurrency transactions illegal and all companies providing cryptocurrency trading services to Chinese citizens as engaged in illicit financial activity.
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And here we are, not even a month later, and bitcoin is up over 50%.
Meet the new boss, same as the old boss
Bitcoin has broken out to new highs against almost every currency there is. It passed them last night, even against the US dollar. Bitcoin’s market cap has never been bigger. The network is stronger than ever. Mining simply relocated.
This is now the 18th time China has attempted to ban bitcoin. Something like that, anyway. Its bans don’t seem to have the desired effect.
The reason for bitcoin’s recent rally, certainly the latter part of it anyway, was the announcement last week that there will, finally, be a listed bitcoin exchange-traded fund (ETF).
Said ETF – The ProShares Bitcoin Strategy ETF (NYSE: BITO) – began trading yesterday. It turned over almost a billion (we don’t know the precise number yet) with more than 24 million shares changing hands.
This makes it the second-most heavily-traded fund on record, beaten only by a BlackRock carbon fund which ranked higher due to pre-seed investments.
We have been waiting a long time. The Winkelvoss twins tried to get a bitcoin ETF off the ground in 2013, when bitcoin was $65. Many others have tried, and here we are finally, eight years on, with the price a thousand times higher.
I guess bitcoin ETFs are like buses. You wait all that time and then two come along at once. This week should also see the launch of the Valkyrie Bitcoin Futures ETF.
I used to be CEO of Canadian-listed privacy tech company Cypherpunk Holdings (CSE: HODL) and I was extremely proud of myself and the team for securing what I thought was the best ticker in the world in HODL.
But, credit where credit’s due, Valkyrie, the fund behind the ETF, have gone one better. They have secured the ticker BTFD. LOL, as they say.
It’s being hailed as a watershed moment for the crypto industry, enabling it to enter the financial mainstream, easily accessible to investors of all shapes and sizes through traditional brokers.
I am less convinced, myself. Call me a grouch. The publicity is good, sure. But bitcoin has done perfectly well without an ETF. Does it even need one?
Crypto is supposed to be an entirely new financial system, where individuals take control of their own keys, their own custody, their own money, freeing themselves of the need for intermediaries and trusted third parties. In that sense an ETF is like a step back.
It feels a bit like French revolutionaries demanding that Marie Antoinette and the aristocracy join them in overthrowing the regime.
If you want to get exposure to bitcoin, there’s an easy answer
What’s more – and I confess I am out of my depth discussing the intricacies of short- and long-dated futures contracts – if my understanding is correct, this ETF is based on futures contracts, not the “spot” price of bitcoin.
The fund, which charges a 1% fee, will have to constantly sell expiring contracts and buy longer-dated ones, which tend to be more expensive. This constant rolling of contracts is going to cost money – estimates say 5%-10% – and that means the ETF might not end up accurately replicating the price of bitcoin itself, which is the very purpose of the thing.
United States Oil Fund (NYSE: USO) used to be a popular ETF for investors hoping to track the oil price. It was supposed to be the oil ETF, basically. But with all the complications of rolling futures contracts, contango and backwardation, it always underperformed the price. Immensely frustrating for an investor to correctly call a market, only for the chosen vehicle not to deliver.
USO is by no means alone in its failure as an ETF to actually track the underlying asset. One hopes BTFD and its investors will not fall into the same trap. I am sure this is something they have prepared for, but it is a concern.
The Grayscale Bitcoin Trust (NYSE: GBTC), market cap $8.5bn, had been the previous way by which traditional investors could buy bitcoin through their brokers. It is a closed-end fund that owns bitcoin directly – not futures – charging 2%. As a closed-end fund, new shares are not created as new money buys in. The trust price is therefore determined by supply and demand for the trust, rather than the price of the asset it is designed to replicate. It has traded at a consistent 20% discount to the price of its bitcoins.
Trusts often trade at a discount to their net asset value (NAV), many perpetually so, which means there is a value proposition there. But that is not why people bought the trust – they bought it to replicate bitcoin’s price and it hasn’t.
What I’m saying is this: if you want to get exposure to bitcoin’s price, then buy bitcoin!
It involves some self-education that many can’t or are not prepared to take on, but that is the sacrifice to be made. I can’t see how synthetic vehicles for mainstream investors will ever be anything but second best.
Grayscale is now, I hear, applying for ETF status. The danger here is that, if it achieves it, it will then sell the bitcoins it currently holds, which could actually mean greater net selling than buying.
We are at new highs. New highs, way more often than not, lead to more new highs. This ETF should mean a lot more money flowing into bitcoin. That has to be bullish.
Beware the curse of the ETF launch
But one final word of warning. I remember the launch of the gold and silver ETFs back in the noughties. Until then it was difficult for mainstream investors to get easy exposure to the gold and silver prices. Buying physical metal was cumbersome – hard to make quick entries and exits with all the delivery and quality complications. Futures contracts presented their own problems.
The gold and silver ETFs were brilliant innovations to make gold and silver quickly and easily tradable. There was a lot of hype about both in the lead up to their launch.
The SPDR Gold Shares exchange-traded fund (NYSE: GLD) launched in late November 2004 and the iShares Silver Trust (NYSE: SLV) in April 2006. We take them for granted now, but they were considerable breakthroughs at the time and there was a lot of excitement.
Gold was trading around $440 an ounce at the time of the launch of GLD. It rallied over the next ten days or so to $450 – and then went into a two-and-a-half-month bear market that saw it go below $415.
When SLV was launched in April 2006, it rallied for a fortnight to $15 an ounce, then crashed 40% to $9.
Bitcoin is a different beast of course. And the mistake with bitcoin has always been to underestimate it.
I am a bitcoin bull – don’t get me wrong on that. But let’s just say it wouldn’t surprise me to see this market rally for a fortnight on all the excitement, then turn around and sell off, just as the gold and silver ETFs did.
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