The $GBTC is a joke, right?
For investors looking to get exposure to Bitcoin, the idea is that the only way is the Bitcoin Investment Trust. But as the saying goes, “A fool and his money are soon parted.”
The GBTC is not an ETF, but a trust. It can only own a certain amount of Bitcoin and does not track the commodity/currency/asset (whatever you’d like to call it) like gold ETFs do with gold. Instead, for one unit of the GBTC, investors get 0.09242821 Bitcoin and also have to pay a 2% annual fee. Today, investors are paying $800 per GBTC unit while the actual net asset value of each unit is $443 -- an 80% premium.
Money continues to flow into Bitcoin and investors are hungry to get exposure. If Bitcoin is going to $100,000, the case can be made, what does it matter if you’re effectively paying double the price today? Well, while Bitcoin can go to $100,000, the sizable premium that GBTC enjoys won’t last forever. Eventually, GBTC could even trade at a discount if we do see an ETF hit the market that tracks the cryptocurrency like that of a gold ETF. As well, competition for investor dollars in the cryptocurrency space are going to rise, and ultimately, I think a cryptocurrency ETF that owns a diversified portfolio of cryptos wins out over the GBTC and any Bitcoin ETFs.
Still, for now, Bitcoin is king with a network -- and that shouldn’t be overlooked -- even for retail investors.
The conventional EBITDA multiple doesn’t work when valuing Bitcoin and cryptocurrencies, and that’s what confuses the likes of Howard Marks and other Wall Streeters. So the valuation conversation is a bit confusing and perhaps futile. Bitcoin is doing what PayPal (PYPL) initially set out to do - create a new world currency. The idea was to create a system that was just a massive database ledger where you had debits and credits, and you never had to leave the system. When PayPal got bought by eBay (EBAY), all that changed.
Some call Bitcoin a commodity, some a currency, others a security. Bitcoin doesn’t want to be the next MasterCard (MA), so it’s not about being a transaction network.
Thinking of Bitcoin as a payment processor is wrong - hence, the reason valuations can be misconstrued. Bitcoin taking some of the fees that MasterCard collects is nice, but the function of Bitcoin as a payment is secondary. Anyone that tries to value Bitcoin as a payment processor is missing the point.
For one there’s Bitcoin the currency and the Bitcoin network and blockchain. The theoretical value of that protocol will grow faster as more applications are built on top of it. The success of applications leads to further growth along the protocol - it’s a vicious cycle that has an exponential style curve, as opposed to a linear one.
As a Bitcoin holder, think of yourself as a shareholder and the network/blockchain/protocol is the company. The company grows as more networked applications are built on top of the network. Sure, applications running on the network will be in competition and those trying to build the Visa (V) on top of the blockchain will have to fight off a lot of competition, but there will be big winners (i.e. applications build on the protocol). But regardless of who wins, the blockchain benefits and the only way for most people to participate is by owning the crypto token - Bitcoin. Modelling that is tough, and next to impossible to old-school analysts on Wall Street.
As for Bitcoin’s technology, it gets an upgrade in November. The block size in the Bitcoin blockchain will double and the transaction speed should increase nicely. Faster, and more, transactions is a big positive for increasing the usefulness of Bitcoin. Then there’s the other major catalyst for Bitcoin, which is, as the cryptocurrency industry gets close to $100 billion in market cap, institutional investors can no longer ignore it. With that, there’s more money looking to buy Bitcoin, as well, there’s more pressure to create a sound public market product that more accurately tracks the Bitcoin price -- unlike GBTC.
In the end, if Bitcoin can prove itself as a stable store of value, it’ll be even closer to being a traditional financial product, which could then win the respect of larger investors. The big key is not to construe what makes Bitcoin valuable - the mining network and protocol - with what the media claims as the usefulness for the token.
And for investors, it’s not hard to buy Bitcoin these days. The biggest exchange is Coinbase and makes setting up an account, funding it, and buying bitcoin rather flawless -- all of which can be done from your phone.
Paying a near 100% premium (with the GBTC) for getting exposure to an asset that was created so you didn’t have to go through Wall Street is rather nonsensical. As well, the Bitcoin that the GBTC is not insured and I’m not sure of how well it’s secured against hackers. You don’t have to be tech savvy or have a computer engineering degree to own Bitcoin outright. That high premium for GBTC will also come crashing down a Bitcoin ETF is approved, or even a cryptocurrency ETF. Be wary.