Bitcoin for now is still outside the realm of traditional personal and investment finance. By that I mean, for the most part you can’t buy bitcoin through the channels that you would typically buy financial assets. You can’t buy bitcoin from your bank like you would foreign exchange. You can’t put a buy order in with your stock broker and leave him to fill it. And you can’t use your online brokerage account either…
For the most part.
Back in March of this year, the Securities Exchange Commission (SEC), the American securities regulator, rejected an application for the first publicly traded bitcoin ETF. At the time, a lot of bitcoin bears pounced on the SEC’s decision. But in an article titled “This is why bitcoin doesn’t need an ETF”, I argued that the ruling wasn’t important to bitcoin’s price trajectory:
At the end of October, the value investor Mohnish Pabrai gave a presentation and took part in a Q&A session at Boston College and Harvard Business School on the Uber Cannibal Investor Framework, which he has developed over the past decade. Uber Cannibals are the businesses “eating themselves by buying back their stock,” the value Read More
“It’s still a good time to buy. If anything, the SEC’s reticence keeps bitcoin out of a lot of investor portfolios for a while longer. This means you have more time to get familiar with it, and start accumulating some.”
Bitcoin was trading at US$1,200 at the time. Currently bitcoin is trading at US$4,500 (and Bitcoin Cash, an additional currency that was spun off to holders of bitcoin early last month is trading at US$600… so your total position today is worth over US$5,000).
It is possible to buy securitised cryptocurrency
The SEC has not approved a bitcoin ETF. There is, however, still a way to buy bitcoin through the traditional channels I talked about earlier.
It’s called the Bitcoin Investment Trust (Exchange; OTC, Ticker; GBTC), a traditional investment vehicle with shares titled to investors name, and it invests exclusively in bitcoin.
It is sponsored by Grayscale Investments, a company that focuses on offering investors digital assets wrapped in familiar investment products. The fund trades in the over-the-counter (OTC) market, not on an exchange, and there is currently around US$800mn in assets under management (AUM).
Sounds great, right? An easy “institutionalised” way for investors to own bitcoin – without the rigmarole of opening bitcoin exchange accounts or figuring out bitcoin wallets and how to store bitcoin safely. (We’ve explained this in detail… go here to read our complimentary beginner’s guide to bitcoin.)
And it gets better! This trust is eligible for tax-advantaged accounts. This means U.S. investors can buy this trust for their retirement 401k accounts. I asked my colleague Kim Iskyan (who holds a U.S. passport) to log in to his U.S. online brokerage account to double check.
Not so fast
But right now this trust is easily the worst way to buy bitcoin.
Take a look at the chart below. This shows the historical share price of the trust (blue line), the net asset value (i.e., the value of the underlying bitcoin per share, red line), and the premium/discount (i.e., how much more or less the share price trades to its underlying intrinsic value).
As you can see, the share price has recently been trading for over 100 percent its underlying asset value. In other words, people buying bitcoin through this trust are paying more than twice the amount they would pay if they were buying bitcoin directly. This is like paying 2 bucks for a 1 dollar note. It’s absurd.
Alarm bells are ringing
Ignorance, desperation, and/or sheer recklessness are the only reasons I can think of for someone to pay a 100 percent premium to buy a digital asset like bitcoin. Sadly, none of these traits make for good investing.
This kind of extreme froth is becoming worryingly pervasive across the cryptocurrency space.
Just take a look at the below tweet from Paris Hilton hawking the initial coin offering (ICO) of a new cryptocurrency token.
Now, Ms Hilton might be famous for lots of reasons, some perhaps less savoury than others, but I don’t recall investment analysis being one of them. It’s one thing to market your perfume – but it’s quite another to recommend investing in a cryptocurrency token.
(Note: I have not taken much time to analyse the Lydian Coin. When I went to their website and clicked on the “Team” link there were no names provided. That’s not a promising sign.)
The crackdown will come…
When regulators see the likes of Paris Hilton shilling “#ThisIsNotAnAd” cryptocurrencies, and when traditional regulated trusts trade at twice their intrinsic valuations, they get itchy trigger fingers. The regulator will want to… regulate.
And rightly so.
The token sale process is a gamechanger for early stage venture funding, especially for ideas that properly leverage and innovate on top of blockchain technology.
But the flipside is that we’re seeing a huge number of ICOs whose businesses have nothing whatsoever to do with blockchain. They are just using tokens as a means of crowdfunding capital.
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Because there’s so much froth in the market, any enterprise even vaguely attached to cryptocurrencies – even if it’s just as a means of fundraising – can find “investors” willing to throw money in.
It’s like companies back in the late 1990’s tech bubble adding a “.com” to their name – just to attach themselves to the red hot technology sector.
My Facebook news feed is littered with paid advertising from companies I’ve never heard of that are advertising their ICOs. That’s not something you see with the initial public offering (IPO) of a stock.
A few days ago, the ICO of a token called Protostarr was halted after the SEC contacted the company. The SEC has already weighed in on ICOs with their opinion.
But what is truly shocking is the fact that according to Forbes magazine, Protostarr never even consulted a lawyer before starting their ICO! Again, that just tells you the whole ICO process is crying out for a regulatory clampdown.
The China crypto crackdown
In China, one of the biggest markets in cryptocurrencies, the the People’s Bank of China (PBOC) today issued a notice halting all ICOs immediately. China has also seen a number of high-profile ICOs with seemingly little viable businesses behind the multi-million-dollar capital raises and the speculative froth has been particularly bubbly in China ICOs.
Not only have all ICOs been suspended, but two major blockchain conferences scheduled to be held in Beijing this month were also abruptly postponed. The latest one being the Bitkan Summit, where some notable blockchain evangelists were scheduled to speak, which was cancelled due to authorities’ “upgraded requirement for public security”, whatever that may be...
We are about to see a big flight to quality in cryptocurrencies. In the short-term we’ll see a shift from the more speculative cryptocurrencies into “crypto-quality” (i.e. bitcoin).
Investors sitting on “junk” tokens will convert back to bitcoin, not cash. Bitcoin will still likely take a correction against fiat (i.e. it will fall in dollar or renminbi terms), but much less than the vast majority of cryptocurrencies.
We’ve seen the Chinese government take these kinds of steps before. In late 2013 the PBOC prohibited Chinese financial institutions from using bitcoins. The price of bitcoin subsequently fell by around 40 percent over the next couple of weeks to just over US$400.
And since then we’ve seen periodic bouts of regulatory noise, particularly directed towards the exchanges. This time the regulator sights are set on the ICOs. And like I said earlier, rightly so. There are so many junk ICOs hitting the market and trying to capitalise on abundant speculative capital that it’s time for a shakeup.
This doesn’t change my overriding recommendation which remains the same - investors interested in cryptocurrencies should simply buy a little bit of bitcoin and tuck it away. As I said recently:
“I own bitcoin the same way I own gold. Locked up, out of sight, and out of mind. The gold will always be there… as for bitcoin, I can’t say that with 100 percent certainty.
But if you ask me which one is likelier to be up 1,000% three years from now, the answer is bitcoin. It’s still just a $45 billion-dollar market cap.”