BK: Bitcoin Hits All Time High on ETF Speculation
In the last 24 hours, bitcoin has hit an new all time high on speculation that the Winkelvoss Bitcoin ETF (COIN) will be approved by the SEC. The new high above $1220 surpasses the 2013 high when an algo associated with the now defunct Mt Gox exchange went haywire. Over the last 4 years, bitcoin has passed multiple milestones and tests – it has come out the other side a strong, stress tested currency. Its resilience is likely contributing to the speculation that an ETF “approval” is likely. The SEC has until March 11, 2017 to deny the application for the Winkelvoss ETF – if the SEC does nothing then the ETF is implicitly “approved”.
Investors are speculating that a last minute update to the ETF filing is a sign that an SEC blessing is forthcoming. The update concerned what is known as a “hard fork”, which is akin to a software upgrade. However, there is a huge difference with a digital currency upgrading software vs something like Microsoft Word. If Microsoft updates Word and some users choose not upgrade its not a big deal – but with a digital currency if all users do not upgrade then there is the potential that the currency splits into two versions – this could have a detrimental impact on the value.
The market euphoria over the ETF is not consistent with analysts estimates and prediction markets. There is one thinly traded prediction market that is indicating a 45% chance of an ETF approval.
On the other hand, Needham estimates that the chance of approval is 25%. IBKHO the argument against approval of an ETF is not very strong. It has been argued that bitcoin to too thinly traded to support an ETF – but bitcoin liquidity is similar to a mid-cap stock and there are plenty of ETFs that contain mid-cap stocks. There is a strong argument to be made that initially $300m could flow into the ETF and that would have a disproportionate impact on price – this is the only argument that actually holds water, but its unclear if this matters to the SEC.
Another argument is that since most of the trading occurs in China the SEC would be reluctant to approve an asset that trades in a potentially unfriendly location. However, in the last few weeks the PBoC has reduced leverage at Chinese exchanges and Japan has now become the top trader of bitcoin. In fact, it is widely expected that major Japanese financial institutions will begin trading bitcoin in 2017.
BK’s bet is that the ETF gets approved – but to be clear I am not making a specific bet on that outcome. To BK, bitcoin and other digital assets are a new asset class for investors that are grossly undervalued relative to their potential use cases. In my view, this is a once in a generation investment opportunity that warrants a long term perspective.