16:29Bitcoin And GBTC: Given Supply-Demand, Higher Prices Are On The Way
Since my first article on the Grayscale Bitcoin Trust (GBTC) pointed out why the adoption of BTC by companies Square (SQ) and PayPal (NASDAQ:PYPL) were a turning point for the cryptocurrency, shares are up 180%+ in less than four months. It was one of my best calls on over 10 years of contributing on Seeking Alpha. Yet the rally is nowhere near over in my opinion - and while investors are currently obsessed about BTC breaking the $50,000 level, I have to believe $100,000 (and even much higher) is certainly possible. I will explain why in this article.
Before discussing recent developments in the BTC space, let me point out a few reasons why Square and PayPal likely threw their support behind BTC to begin with:
Both companies have large global platforms.
In December, old-school and highly respected 169-year-old MassMutual invested $100 million in BTC.
I actually think these estimates are on the low end. Why? Because ARK's estimate is conservative given it was solely based on the balance sheets of S&P 500 companies. Yet, as we all know, BTC operates on a global distributed network and is available to companies all over the globe - particularly Chinese companies. We also know that China is the undisputed leader in bitcoin mining. It's not hard to put 2+2 together.
Consider: Alphabet (GOOG) (NASDAQ:GOOGL) ended 2020 with $136.7 billion in cash. 1% of its balance sheet equates to $1.36 billion. At pixel time, BTC's current market cap is $925.3 billion. That means that 1% of GOOG's balance sheet alone equates to 0.15% of BTC's current market-cap.
ARK's estimate also does not consider high-net-worth individuals that are likely attracted to BTC given the coverage and outstanding returns and can easily afford a 1-5% allocation.
In addition, my experience is, and from watching the questions I hear on CNBC on a frequent basis, despite the length of time since BTC was initially established, and the wealth of information about it that is readily available online, there still seems to be - generally - a lack of investors who actually understand how block chains work, and the basics of how the BTC distributed network functions. As time goes on, and more and more investors actually understand how block chains and BTC works, my hunch is more investors will find it attractive and allocate capital to BTC.
Lastly, ARK Invest's crack research team also pointed out that "HODLs" have become increasingly long-term oriented. That is, more owners of BTC are simply buying and holding, as opposed to short-term trading or actually using BTC to make purchases. ARK's data shows that ~60% of BTC have been held for more than one year. That's up from an estimated 40% from five years ago:
What is HODL?
At 10:03 a.m. UTC on Dec. 18, GameKyuubi posted "I AM HODLING," a drunk, semi-coherent, typo-laden rant about his poor trading skills and determination to simply hold his bitcoin from that point on. "I type d that tyitle twice because I knew it was wrong the first time. Still wrong. w/e," he wrote about the now-famous misspelling of "holding." "WHY AM I HOLDING? I'LL TELL YOU WHY," he continued. "It's because I'm a bad trader and I KNOW I'M A BAD TRADER. Yeah you good traders can spot the highs and the lows pit pat piffy wing wong wang just like that and make a millino bucks sure no problem bro."
The term HODL stuck.
High Net Worth Investors
GBTC is a trust, not an ETF. As such, it typically does not trade at NAV and most often it is at a premium. You can go to the GBTC homepage at any time, get the current outstanding share count, and the current BTC/share estimate (both readily available), and using the current price of BTC, get a good idea of the premium you are paying to own BTC through the GBTC trust.
Now, some SA contributors have said GBTC will sink like a rock in water when an ETF comes out that trades at NAV. However, what they are missing is the fact that GBTC already owns a lot of BTC, currently estimated at 653,825 - or ~3.5% of the total current BTC supply. So when a new BTC ETF does arrive on the market, and I do think one eventually will, it will have to begin purchasing BTC. That, of course, will push-up the value of the estimated 653,825 BTC that the GBTC Trust already owns. See what I mean?
Another risk investors should be aware of is "lock out". What I mean by that is BTC trades 24/7/365. It does not take off weekends or holidays. Yet GBTC only trades when the NASDAQ market is open. That being the case, if you are the anxious type and will spend weekends staring at the most recent BTC quote, GBTC likely is not for you.
In addition, note that Coindesk (and other sites) typically quote BTC's change over a 24-hour period, for example:
Investors viewing GBTC's closing price on Friday (for example) need to take into context that on Monday morning's open, the CoinDesk reported 24-hour percentage change will be with respect to Sunday morning's price (not Friday's close...). Considering BTC's volatility, that price is typically and substantially different than the price at Friday's close. The point is, to take into account these differences so that you understand why the price of BTC can be quoted up (and significantly so) Monday morning, while the corresponding GBTC trade could be down (and significantly so). And vice versa.
Lastly, there is the chance of regulatory risk on a country-by-country basis. But since BTC runs on a global distributed network, it will just jump from one country to the next. That is, there is no single "off switch" for BTC. That is true for the US, China, or any other country.
All that said, BTC and the GBTC Trust no doubt fits into the "speculative growth" category within an investor portfolio. Many investors should not even have a "speculative growth" category because they don't have money to lose - and they could certainly lose it, or much of it. At the same time, there are many high net-worth individuals that can easily afford a 1%-5% allocation (as I recommended in my articles on portfolio management, like this one).
Summary and Conclusion
In addition to corporate balance sheet investments, I believe BTC will increasingly see demand coming from high-net-worth individuals the world over, including in China.
For those skeptical investors out there who question the risks of owning BTC, and there certainly are some as mentioned previously, the better question might be: what is the risk of not owning it and holding a US dollar that depreciated over 8% over the past year? Not allocating a small slice of your portfolio to an emerging asset like BTC - which has proved it can deliver "alpha" - could mean falling behind in terms of your overall net-worth as compared to other investors that do invest in BTC.
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