Lessons From The Crypto
Bitcoin (COIN), as many of you may well know, had quite a stellar correction last week. Prices of the digital asset traded drastically lower throughout the week after topping out at near $20,000 on Monday. On Friday morning, prices on most exchanges saw Bitcoin crater to the tune of roughly 45% from Monday's highs. As Bitcoin hit an intraday low below $12,000, Bitcoin futures traded down to about $11,800 and the Bitcoin Investment Trust (OTCQX:GBTC) hit an intraday slump of about $1,155, before it bounced back with a vengeance as prices of Bitcoin stabilized and began to move higher.
Source: coinmarketcap.com
About GBTC
GBTC is an ETN designed to track the price of Bitcoin, the fund owns Bitcoins and each share in the fund represents roughly 9.2% of one Bitcoin. GBTC is the first and only such instrument at this time that allows the trading of Bitcoin through the easy use of an ETN. The only other ways to directly bet on the prices of Bitcoin remain direct purchases of the cryptocurrency and futures trading. GBTC allows market participants to bet on the prices of Bitcoin by owning shares in the fund, which is much like owning a stock or an ETF.
The Premium Aspect
Due to GBTC being the only such structured product at this time, investors typically pay a premium to own it. I've seen GBTC trade at a premium of anywhere from about 5-10% all the way up to nearly 100% in relation to Bitcoin. For example, when euphoria appeared to be to maxing out, BTC was trading above $19,000, and investors were willing to pay nearly double to own GBTC, as it traded above $3,500.
Source: Businessinsider.com
Retail and other investors who may not have access to Bitcoin directly and for whatever reason don't trade futures contracts bid GBTC's price up to what can only be described as obscene levels. After all, why would you pay nearly double for what something is worth? Especially if it may already be overvalued as is. Nevertheless, people are and they do. I guess this is part of the whole "mania" aspect concerning the Bitcoin phenomenon.
GBTC Trade
GBTC prices were trading at obscene levels on Monday and Tuesday, at which point market participants were willing to pay roughly 100% premiums just to own the shares in the fund. Furthermore, GBTC exhibited a wild 30% intraday move on Tuesday, indicative of a blow off top.
I wrote a Marketplace article detailing the underlying developments in which I mentioned that during a major selloff, panic selling in GBTC would likely wipe out the majority or possibly all the premium associated with owning the fund's shares. I also mentioned that at a premium of 10-15% or less GBTC was worth looking at for a long play. Such drastic changes in premiums may also represent possible short-term Bitcoin bottoms.
Source: Bitcoin.org
Fewer than three days later, GBTC hit an intraday low of roughly $1,155, at which time the ETN was down by about 67% from an intraday high of $3,523 hit on Tuesday. As market participants began to panic and a rush for the doors ensued, nearly all of GBTC's premium got erased. While Bitcoin futures dipped to $11,800, GBTC traded down to $1,155, at which time a premium of only 6% was being paid to own the ETN's shares.
However, as soon as Bitcoin stabilized at around $12,000 and began to move marginally higher, a rush of money came pouring into GBTC, and the ETN skyrocketed, gaining roughly 50% inside one hour of trade. GBTC ended up closing 12% higher on the day, at a price of $1,990, 72% higher from its intraday low of $1,155. It's important to mention that Bitcoin and Bitcoin futures rebounded from their bottom by only about 15-20% in this same time frame, and by the close GBTC's premium had surged to roughly 50% in relation to BTC.
GBTC 1-Year Chart
Source: Stockcharts.com
Lesson from the Crypto
GBTC, for the time being, while it is still the only ETN pertaining to Bitcoin can serve as a valuable sentiment indicator. This information can in turn be utilized to gauge upcoming price movements in Bitcoin, Bitcoin futures, and GBTC.
When the premium gets blown out to irrational levels, 80-100%, possibly higher, this may suggest that the buying situation is reaching a fever pitch and a price adjustment may materialize in Bitcoin and in GBTC. On the flipside, when the premium dips below 20%, or even melts away to 5%, or possibly even lower in extreme cases, this may be a good indicator of panic selling and possible capitulation, which is usually followed by a sharp turnaround in price.
Furthermore, when a reversal occurs, GBTC is likely to drastically outperform Bitcoin and Bitcoin futures, as was illustrated on Friday. A rush of capital came flowing in, which ballooned the premium in GBTC from about 6% all the way up to roughly 50%, equating in an intraday gain of 72% compared to roughly 20% in Bitcoin and BTC futures.
What to Expect Going Forward: My Views on Bitcoin
Short Term: Even after the recent drastic decline in BTC prices, Bitcoin may still be perceived as being overvalued short-term. And despite the recent rebound, Bitcoin could retest the prior lows hit Friday, and may even resume its slide to new lows next week.
Long Term: I am still constructive in Bitcoin long-term, and indications point to this being a healthy correction and not a bear market or a "bursting of the bubble" in Bitcoin. There is still massive demand and robust appetite for the cryptocurrency, thus it is likely that once this correction process is concluded, prices will get back on the Bitcoin elevator to proceed higher.
I want to reiterate that despite what appears to be a possible double bottom in BTC's seven-day chart, prices could continue to correct significantly lower from current levels; there is no guarantee that the low was put in last week. Levels to watch for support are $12,000, then $10,000, and possibly $5,000-6,000. Hopefully we won't go down that far, but with the immense volatility in this market just about anything is possible.
Reasons for Being Bullish on Bitcoin Long-Term
Bitcoin coupled with blockchain is a revolutionary phenomenon, a brilliant technology able to possibly effectively compete with the current fiat-based monetary system. BTC's decentralized nature, popularity, track record, and multi-functional capabilities should enable the cryptocurrency to spearhead the effort to eventually challenge the current status quo in the financial industry.
Still Opening Stages of This Paradigm Shift
Bitcoin/blockchain technology is essentially still in its initial stages of development and adoption. Nevertheless, the phenomenon is already illustrating distinct potential in capturing market share in the global medium of exchange and worldwide store of value markets.
Source: Bitcoinnews.com
Institutional Ownership is Still Very Low
Wall St. is just getting into the cryptocurrency game, and institutional ownership is likely to increase going forward. Goldman Sachs (NYSE:GS) recently announced that it will be opening a digital currency trading desk, adding further validity to the digital movement and increasing the probability for higher future institutional ownership of Bitcoin and other cryptos.
Furthermore, a recent poll indicated that institutions are starting to recognize the long-term potential in BTC, as 62% of fund managers said they were either beginning to buy Bitcoin or were seriously contemplating about opening positions. In any case, institutions are just starting to enter the cryptocurrency segment and a lot more capital is likely to flow into Bitcoin and other digital assets, as institutional positions are likely to take years to fill out.
Source: Bitsonline.com
Very Low Adoption Rate
With only about 21 million blockchain wallets, cryptocurrencies are owned by a very small portion of the global community. In fact, only about 0.4% of the world's population that has access to bank accounts own digital currency. With such an extremely low adoption rate and the enormous potential the industry represents, it is very unlikely that this movement is anywhere other than in its infancy. Therefore, the current run-up in price is not "the bubble to end all bubbles" but is an appreciation in price due to increased demand.
Still a Very Small Portion of the World's Financial System
At the time of writing this article, Bitcoin's market cap had dipped to under $220 billion, and the total market cap of all the listed digital currencies was under $500 billion. This may sound like a lot of money, but this is far less than the world's cash and coin supply which is worth about $7.6 trillion, or the gold market which is worth about $7.7 trillion.
Source: Coindesk.com
This is just the physical stuff, the broad money supply which includes checking, saving, and money market accounts is worth an astounding $90 trillion, and the world's derivatives market is valued at a mind-bending $544 trillion to $1.2 quadrillion. Bitcoin's market cap of less than 25% of Apple's (AAPL) value is minuscule in the greater scheme of things and likely has a lot more catching up to do before BTC captures a noteworthy place in the global monetary system.
Why Bitcoin Remains Attractive Despite Various Altcoins
Other cryptocurrencies may be faster or more efficient than Bitcoin for certain transactions, but they can't take away from Bitcoin its gold standard in the cryptocurrency industry. Moreover, there are constant initiatives and innovations taking place to solve some of Bitcoin's biggest issues such as scalability and rising transaction costs.
BTC has a multiyear head start, is the best established, has the most significant infrastructure, and thus has the advantage in the industry as the predominant digital asset leader. Numerous people are now conditioned to see Bitcoin as the gold standard of the digital world, it has been legitimized by futures trading, some governments are even starting to recognize BTC as legal tender, and it should remain as the go-to investment vehicle when it comes to digital currencies.
Potential Risks Regarding Bitcoin
Despite the enormous upside potential that comes inherent with a new revolutionary technology such as blockchain and Bitcoin, several significant risks do exist.
How to Value Bitcoin?
The first thing I would like to point out is that it is difficult to value the cryptocurrency. There are no earnings to speak of, no P/E ratio, and no applicable growth rate. There is only supply, demand and the price that people are willing to pay for it. This is one of the reasons why there is such enormous debate about whether Bitcoin is in a bubble, is overvalued, and so on.
On the one side, this is a very positive phenomenon for Bitcoin's price, because supply is capped and demand is robust. However, since people don't really know how to value Bitcoin, the price could be perceived as being overvalued at just about any time. This can lead to large selloffs as investor sentiment changes from time to time.
Whale Selling
Roughly 40% of all Bitcoins are owned by just 1,000 individuals. On the one hand, this is positive as it illustrates a strong belief in the ecosystem surrounding Bitcoin and its long-term potential on behalf of the insiders. Yet, on the flipside of this equation, if the whales ever started selling Bitcoin in mass, or even sold moderate portions of their enormous Bitcoin holdings, this could create violent downward drafts in volatility that could incite panic selling and bring prices of Bitcoin down significantly.
Source: Bloomberg.com
Government Intervention
Unfavorable government regulation, the rollback of positive regulation, or the outright outlawing of Bitcoin would be an extremely negative development for BTC's price. This is likely the most significant risk to Bitcoin prices long-term right now. Although a drastic shift in regulation is not likely at this point, as Bitcoin gains popularity, momentum, and further price appreciation, it could begin to threaten and challenge the current status quo. At this point, government regulators may begin to step in with more draconian measures concerning regulation of cryptos. This could ultimately lead to massive price drops regarding Bitcoin and other digital assets.
Source: Steemit.com
Security Concerns
Security concerns regarding custodial accounts and exchanges are an ongoing issue. People understandably get nervous when breaches occur and individuals lose large sums of money. Fortunately, these cyberattacks normally have transient effects on the overall market and there are legitimate ways people can protect their digital wallets and coins, by holding them on an offline device, and by taking additional security-related precautions.
Quantum Computing
Quantum computing, while it is still mostly the subject of science fiction, is getting closer to becoming a reality. Some experts say that the advent of quantum computers is likely to harness enough computing power to break the currently impregnable Bitcoin code. This may even happen within the next 10 years researchers claim. While it is possible that there may be some new security measures in place capable of repelling such attacks by that time, this appears to be the most significant threat Bitcoin faces long term. A disruption of Bitcoin's blockchain would be a disastrous development that could shatter confidence in the system and cause prices to permanently crash.
Source: Medium.com
The Bottom Line
This is not the first big selloff in Bitcoin, nor will it be the last. Market participants should keep an eye on GBTC's premium for short-term directional indications concerning price movements and possibilities to make significant returns in relatively short time periods.
Moreover, whether the Bitcoin selloff continues or not next week, it will likely present a favorable long-term entry point. Bitcoin has meaningful long-term potential and is likely to play an instrumental role in the world's financial system down the line. The low adoption rate, insignificant institutional ownership, and a relatively small market share suggest Bitcoin can gain significant ground in the global medium of exchange and store of wealth markets going forward. Therefore, the underlying selloff in BTC is likely a healthy correction rather than a bubble pop.
The ultimate lesson from the crypto appears to be to buy the big dips, and sell the rips in GBTC (watch the premium).
Disclosure: I received a very favorable early Christmas present from the Bitcoin Investment Trust last Friday. I bought GBTC at $1,200 shortly flowing Friday's open and sold it at $1,700 about 45 minutes later, good for a 42% gain. This was my first time trading GBTC, and it turned out to be one of my most successful short-term trades ever.
Note: Bitcoin and GBTC remain very volatile and unpredictable speculative trading vehicles. Moreover, BTC may still be overvalued right now and may warrant a further price adjustment in the short term.
Merry Christmas, happy holidays, and I wish everyone a very happy and prosperous New Year!
Important Note: This article expresses solely my opinions, is produced for informational purposes only, and is not a recommendation to buy or sell any securities. Investing comes with risk to loss of principal. Please always conduct your own research and consider your investment decisions very carefully.
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Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in GBTC over the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: I am long Bitcoin and I plan to add more on pullbacks. I want to buy GBTC on major pullbacks when the premium drops significantly.
Victor Dergunov
https://seekingalpha.com/article/4133726-bitcoin-lessons-crypto