As long-time readers will know, I have been encouraging readers to buy bitcoin since 2013. I continue to do so. Everybody should own some bitcoin. Its potential is too enormous to ignore, and I feel a percentage of everybody’s portfolio should be allocated to it. If I had a bitcoin for every person who has come up to me and said how they should have bought it when they first heard me talking about it, but didn’t, I’d be richer than bitcoin’s founders.
By owning bitcoin you are effectively owning shares in perhaps the most technologically brilliant system of money in history. The technology is already becoming the template for national currencies in the form of central bank digital currencies (CBDCs), but as a supranational money for the borderless medium
that is the internet, and with its capacity for micropayments, bitcoin’s potential scalability dwarfs that of national currencies.
With its finite supply, it has the potential to become a widespread online-savings vehicle for both individuals and corporations. Bitcoin benefits from its incredibly robust blockchain (the digital ledger that underpins the cryptocurrency). It is well established as the first and foremost cryptocurrency, making it easier to expand its network. Bitcoin’s Lightning Network, a blockchain-based technology, makes bitcoin transactions incredibly quick.
Given all this, in a world of artificial intelligence (AI) and automated payments, it has the potential to become the default cash system for the internet, the standard on which internet monies, from the M-Pesa to Air Miles, are based. Why not have a piece of that potential pie?
If I look at the combined average IQ of people in the bitcoin sector and compare it with, say, gold mining, there is no contest. Bitcoin abounds with brain boxes. By owning bitcoin, you are effectively leveraging this extraordinarily high combined IQ.
I don’t think it is going to the moon tomorrow. Bitcoin tends to go through a cycle. The first phase I call “quiet accumulation”, which is followed by “frenzy and a blow-off top”. Thirdly, there is the “monster correction”. Finally, we reach a stage of “frustrating consolidation”.
We’re somewhere in phase four or one, although such phases can last a long time. But news broke a fortnight ago of what could prove a landmark court ruling for bitcoin. The Financial Times, traditionally sceptical about bitcoin, called it “a big win”.
Legal imbroglios
The decision concerned the Greyscale Bitcoin Trust, which listed in the US in 2013 and buys and holds bitcoin. So in buying the trust investors are, in effect, buying bitcoin, or at least getting exposure to the bitcoin price. Greyscale now has something like $17bn under management.
However, investors cannot sell their shares and redeem them for bitcoin. They can only sell them to someone else. This means in effect that the trust cannot sell its bitcoin: the amount of bitcoin in the trust can only increase (as it issues more shares). At first the trust traded at a considerable premium to the bitcoin price: it was the only way investors could own bitcoin via a broker. At times Greyscale traded at double the value of its bitcoin holdings. However, in recent years this reversed, so that by December last year the trust was trading at a 50% discount to the bitcoin price. What was the point of owning the trust then, if it doesn’t track the bitcoin price?
Greyscale had a problem. The solution was to convert the trust into an exchange-traded fund, so it would be able to buy and sell bitcoin according to the market’s demand, thus accurately tracking the price. For years Greyscale has been trying to get permission. But the US financial regulator, the Securities and Exchange Commission (SEC), rejected its application.
A question of balance
The SEC has repeatedly ruled against other bitcoin ETF applications too. There have been so many. The Winklevoss brothers tried to get one listed. So did Cathie Wood. They were all rejected. There are at least half a dozen other proposals under consideration from the likes of BlackRock, WisdomTree and Fidelity. But it is clear that the SEC, like the UK’s City regulator, the FCA, does not like crypto. Gary Gensler, chair of the SEC, has issued a plethora of regulatory actions against the likes of Coinbase and Binance. The latter is the largest crypto exchange in the world.
To be balanced, the SEC has approved ETFs based on bitcoin futures. But it has argued, not so unreasonably given its remit, that bitcoin trades on unregulated exchanges and can be prone to market manipulation.
A fortnight ago, however, a federal appeal court in Washington ruled that the SEC was wrong to reject the bitcoin ETF application Greyscale brought last year. “The denial of Grayscale’s proposal was arbitrary and capricious because the Commission failed to explain its different treatment of similar products,” said one of the three judges. The Grayscale appeal focused on one simple question: whether it could offer a spot bitcoin ETF that would expose retail investors to the real-time price of bitcoin.
The fact is that there is a lot of demand for a bitcoin spot ETF, not just in the US but worldwide. We shall see if the SEC now appeals, but the upshot is that a spot bitcoin ETF now looks a lot more likely. An ETF will open up entirely new markets for bitcoin both at the retail and the institutional level. It will bring a lot more money into bitcoin. With bitcoin’s limited supply, that has to be very bullish.
With a bitcoin ETF in the US, the FCA here in the UK will almost certainly have to reevaluate its anti-crypto stance, which has made it so difficult for UK investors to invest in this sector via traditional brokers. We shall see.
