Some thoughts on the bitcoin ETF
What are the implications?
It now looks like the bitcoin ETF may be approved as soon as Wednesday - tomorrow.
This story has been generating a lot of excitement and bitcoin has been rallying in anticipation. As I write, we are at $47,000.
I just have a couple of thoughts that I wanted to share: first about the implications of the ETF for bitcoin and, second, about what it means for Microstrategy (NYSE:MSTR), our chosen vehicle to play bitcoin if you only use tradfi. (The company has done very well since we covered it in the summer).
(See this footnote1 if you need to know what an ETF is).
A classic case of “buy the rumour, sell the news”?
The obvious parallel here is with the launch of the gold and silver ETFs back in the noughties. These were both major landmarks for the precious metals - as big as a bitcoin ETF is for bitcoin now - and there was a lot of hype going into the launch of each. On both occasions the pattern was the same: the price of the underlying commodity rose sharply going into the event. Then, a day or three after the listing of the ETF, the price fell. The launch of both the gold and silver ETFs were classic cases of buy the rumour sell the news.
I have to say: given the amount of excitement over the bitcoin ETFs, it really would not surprise me to see something similar now.
However, the ETFs enabled a lot of money to come into the gold and silver markets and, over the long term, the gold and silver prices both went up. The ETFs were a major factor in the bull markets that gold and silver enjoyed in the noughties.
As you know, I regard bitcoin as a long-term buy and hold. It is a technologically superior form of money to fiat and I’m of the opinion that any sell off will only last a few months at most, if indeed, it happens at all. (The post-ETF gold and silver sell-offs only lasted several months).
On the other hand, bitcoin sell-offs can be brutal. So do not be surprised if, for example, bitcoin were to pull back to $25,000 or something.
There is also, of course, the other possibility, indeed probability, that bitcoin rallies on the news. There really isn’t that much bitcoin available to buy and the kind of money that can now come into this market, especially from institutions and private investors, who feel more comfortable buying ETFs than they do taking custody of bitcoin, is so large that over the longer term these ETFs can only be bullish for the bitcoin price.
Moving on to our pick, Microstrategy (NYSE:MSTR).
In my opinion, Microstrategy is a great company, and Michael Saylor is a visionary. I’m quite comfortable holding stock in a company that is steered by him.
However, many investors, particularly in North America, have been using Microstrategy as a bitcoin proxy: a vehicle by which to play bitcoin. It now trades at a 30-40% premium, as a result. When the ETF launches, many might prefer to cash in the Microstrategy premium and hold the ETF instead. I’m pretty sure long bitcoin, short MSTR will become a trade - in fact it already seems to be happening - until MSTR returns to “fair value”. That means Microstrategy will meet with some selling. So a possible scenario is that Microstrategy sells off or is flat, even if the bitcoin price rises.
Saylor and his team will no doubt be aware of this and have some kind of plans in place. However, it leaves the UK Investor in a difficult situation.
Because of FCA rulings, we in the UK, cannot buy the bitcoin ETFs when they launch. Our only option - through a broker - is Microstrategy. The stock has done very well since I covered it in the summer. If it meets with the above selling, we are left in a bit of a pickle.
The prudent trade is sell Microstrategy, buy bitcoin ETFs. We in the UK cannot do that, so we are left in a bind. Thank you FCA.
That is the situation as I see it.
Owning bitcoin directly avoids the Microstrategy issues and my guide to buying bitcoin is here).
I hope these thoughts guide you in whatever decisions you choose to take. I, personally, am just HODLing on
I am not regulated by the FCA or any other body as a financial advisor, so anything you read above does not constitute regulated financial advice. It is an expression of opinion only. Please do your own due diligence and if in any doubt consult with a financial advisor. Markets go down as well as up. I do not know your personal financial circumstances, only you do, but never speculate with money you can’t afford to lose.
What is an ETF - exchange traded fund? An ETF trades on a a regular stock exchange. You can buy or sell it it as you would buy or sell any security. Each ETF specialises in something - it might be gold, it might be the S&P500 - and it owns whatever it is it specialises in. So a bitcoin ETF would hold bitcoin. In buying the ETF you would effectively own shares in the bitcoin it holds. The price of the ETF would rise and fall with the price of bitcoin. Thus an ETF is a simple way to get exposure to a particular market via a broker.