Bitcoin’s big boom has yet to begin
Regulators regard the cryptocurrency with suspicion, says Dominic Frisby. But there has been a breakthrough.
As long-time readers will know, I have been encouraging readers to buy Bitcoin since 2013. I continue to do so. Everybody should own some Bitcoin. Its potential is too enormous to ignore, and I feel a percentage of everybody’s portfolio should be allocated to it. If I had a Bitcoin for every person who has come up to me and said how they should have bought it when they first heard me talking about it, but didn’t, I’d be richer than Bitcoin’s founders.
By owning bitcoin you are effectively owning shares in perhaps the most technologically brilliant system of money in history. The technology is already becoming the template for national currencies in the form of central bank digital currencies (CBDCs) but as supranational money for the borderless medium
that is the internet, and with its capacity for micropayments, bitcoin’s potential scalability dwarfs that of national currencies.
With its finite supply, it has the potential to become a widespread online-savings vehicle for both individuals and corporations. Bitcoin benefits from its incredibly robust blockchain (the digital ledger that underpins the cryptocurrency). It is well-established as the first and foremost cryptocurrency, making it easier to expand its network. Bitcoin’s Lightning Network, a blockchain-based technology, makes Bitcoin transactions incredibly quick.
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Given all this, in a world of artificial intelligence (AI) and automated payments, it has the potential to become the default cash system for the internet, the standard on which internet monies, from the M-Pesa to Air Miles, are based. Why not have a piece of that potential pie?
If I look at the combined average IQ of people in the Bitcoin sector and compare it with, say, gold mining, there is no contest. Bitcoin abounds with brain boxes. By owning Bitcoin, you are effectively leveraging this extraordinarily high combined IQ.
I don’t think it is going to the moon tomorrow. Bitcoin tends to go through a cycle. The first phase I call “quiet accumulation”, which is followed by “frenzy and a blow-off top”. Thirdly, there is the “monster correction”. Finally, we reach a stage of “frustrating consolidation”.
We’re somewhere in phase four or one, although such phases can last a long time. But news broke a fortnight ago of what could prove a landmark court ruling for bitcoin. The Financial Times, traditionally sceptical about Bitcoin, called it “a big win”.
Legal imbroglios
The decision concerned the Greyscale Bitcoin Trust which was listed in the US in 2013 and buys and holds Bitcoin. So in buying the trust investors are, in effect, buying Bitcoin, or at least getting exposure to the Bitcoin price. Greyscale now has something like $17bn under management.
However, investors cannot sell their shares and redeem them for Bitcoin. They can only sell them to someone else. This means in effect that the trust cannot sell its Bitcoin: the amount of Bitcoin in the trust can only increase (as it issues more shares). At first the trust traded at a considerable premium to the Bitcoin price: it was the only way investors could own Bitcoin via a broker. At times Greyscale traded at double the value of its Bitcoin holdings. However, in recent years this reversed, so that by December last year the trust was trading at a 50% discount to the Bitcoin price. What was the point of owning the trust then, if it doesn’t track the Bitcoin price?
Greyscale had a problem. The solution was to convert the trust into an exchange-traded fund, so it would be able to buy and sell Bitcoin according to the market’s demand, thus accurately tracking the price. For years Greyscale has been trying to get permission. But the US financial regulator, the Securities and Exchange Commission (SEC), rejected its application.
A question of balance
The SEC has repeatedly ruled against other Bitcoin ETF applications too. There have been so many. The Winklevoss brothers tried to get one listed. So did Cathie Wood. They were all rejected. There are at least half a dozen other proposals under consideration from the likes of BlackRock, WisdomTree and Fidelity. But it is clear that the SEC, like the UK’s City regulator, the FCA, does not like crypto. Gary Gensler, chair of the SEC, has issued a plethora of regulatory actions against the likes of Coinbase and Binance. The latter is the largest crypto exchange in the world.
To be balanced, the SEC has approved ETFs based on Bitcoin futures. But it has argued, not so unreasonably given its remit, that bitcoin trades on unregulated exchanges and can be prone to market manipulation.
A fortnight ago, however, a federal appeal court in Washington ruled that the SEC was wrong to reject the Bitcoin ETF application Greyscale brought last year. “The denial of Grayscale’s proposal was arbitrary and capricious because the Commission failed to explain its different treatment of similar products,” said one of the three judges. The Grayscale appeal focused on one simple question: whether it could offer a spot Bitcoin ETF that would expose retail investors to the real-time price of Bitcoin.
The fact is that there is a lot of demand for a Bitcoin spot ETF, not just in the US but worldwide. We shall see if the SEC now appeals, but the upshot is that a spot bitcoin ETF now looks a lot more likely. An ETF will open up entirely new markets for bitcoin both at the retail and the institutional level. It will bring a lot more money into Bitcoin. With Bitcoin limited supply, that has to be very bullish.
With a Bitcoin ETF in the US, the FCA here in the UK will almost certainly have to reevaluate its anti-crypto stance, which has made it so difficult for UK investors to invest in this sector via traditional brokers. We shall see.
This article was first published in MoneyWeek's magazine. Enjoy exclusive early access to news, opinion and analysis from our team of financial experts with a MoneyWeek subscription.
Dominic Frisby (“mercurially witty” – the Spectator) is the world’s only financial writer and comedian. He is MoneyWeek’s main commentator on gold, commodities, currencies and cryptocurrencies. He is the author of the books Bitcoin: the Future of Money? and Life After The State. He also co-wrote the documentary Four Horsemen, and presents the chat show, Stuff That Interests Me.
His show 2016 Let’s Talk About Tax was a huge hit at the Edinburgh Festival and Penguin Random House have since commissioned him to write a book on the subject – Daylight Robbery – the past, present and future of tax will be published later this year. His 2018 Edinburgh Festival show, Dominic Frisby's Financial Gameshow, won rave reviews. Dominic was educated at St Paul's School, Manchester University and the Webber-Douglas Academy Of Dramatic Art.
You can follow him on Twitter @dominicfrisby
-
Private school fees soar and VAT threat looms – what does it mean for you?
Rising private school fees could see more than one in five parents pull their children out of their current school. Before you remortgage, move house or look to grandparents for help, here’s what you need to know.
By Katie Williams Published
-
Best and worst UK banks for online banking revealed
When it comes to keeping your money safe, not all banks are equal. We reveal the best and worst banks for online banking when it comes to protecting your money from scams
By Oojal Dhanjal Published
-
AstraZeneca CEO’s £1.8mn pay rise approved despite shareholder opposition
AstraZeneca hiked its dividend to persuade shareholders to accept CEO Pascal Soriot’s pay rise. Is he worth his salary?
By Dr Matthew Partridge Published
-
Adidas, Nike or Jordans - could collectable trainers make you rich?
The right pair of trainers can fetch six figures. Here's how you can start collecting vintage Adidas, Nike or Jordans now
By Chris Carter Published
-
The industry at the heart of global technology
The semiconductor industry powers key trends such as artificial intelligence, says Rupert Hargreaves
By Rupert Hargreaves Published
-
Three emerging Asian markets to invest in
Professional investor Chetan Sehgal of Templeton Emerging Markets Investment Trust tells us where he’d put his money
By Chetan Sehgal Published
-
What to consider before investing in small-cap indexes
Small-cap index trackers show why your choice of benchmark can make a large difference to long-term returns
By Cris Sholto Heaton Published
-
Why space investments are the way to go for investors
Space investments will change our world beyond recognition, UK investors should take note
By Merryn Somerset Webb Published
-
Time to tap into Africa’s mobile money boom
Favourable demographics have put Africa on the path to growth when it comes to mobile money and digital banking
By Rupert Hargreaves Published
-
M&S is back in fashion: but how long can this success last?
M&S has exceeded expectations in the past few years, but can it keep up the momentum?
By Rupert Hargreaves Published