All of a sudden, everybody loves Bitcoin.
The King of Cryptocurrencies just traded at a new all-time high near $20,000 per coin. And, as happens when assets are in rally-mode, everybody wants a piece of it.
Of course, most folks weren’t all that interested in owning Bitcoin when it was floundering around $10,000 per coin a few months ago. But today, with Bitcoin trading nearly 100% higher, just about everybody is bullish.
The most recent surge of optimism came on Monday when the Guggenheim Strategic Opportunities Fund announced it would invest up to 10% of its fund in the Grayscale Bitcoin Trust (GBTC).
GBTC is essentially an exchange-traded fund (ETF) that tracks the price action of Bitcoin. It’s the easiest way for most folks to gain exposure to Bitcoin. Rather than opening up a digital wallet, and dealing with whatever complications that entails, traders can buy shares of GBTC directly in their brokerage accounts.
Guggenheim’s announcement put a lot of attention on GBTC. And, folks rushed in to buy the stock.
But that’s a crazy thing to do right now…
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GBTC closed on Monday at $23.19 per share. The net asset value of the Bitcoin it owns, though, is worth only $18.16 per share.
In other words, investors are paying a 28% premium to buy GBTC versus buying Bitcoin itself. That’s nuts!
That’s like paying $1.28 to buy a $1 bill. No rational person does that.
Of course, GBTC has ALWAYS traded at a premium to its net asset value. It’s an easier way to buy and sell Bitcoin. So, until the cryptocurrency market becomes more liquid, GBTC is going to trade at a premium to its net asset value.
Historically, though, that premium is usually around 10%-12%. The current 28% premium is excessive.
And, when we’ve seen this situation before – like in June 2019, December 2017, and in February of this year – it signaled the price of Bitcoin was nearing at least a short-term top.
No matter how bullish you might be on Bitcoin, it doesn’t make much sense to pay a 28% premium to own it by buying GBTC at the current level.
Best regards and good trading,
In today’s mailbag, Market Minute subscriber Don replies to Jeff’s cautionary tale in the Thanksgiving essay…
Your cautionary point is well-founded Jeff, but I believe it’s a little premature. When the market becomes a “buying frenzy,” then it’s time to watch the buy-to-sell ratio and take your profits on the upslope. When the ratio starts favoring the selling side of the ratio, then that’s the time to unload, because that normally comes harder and faster than the upside.
We’re not, at this point, in a “frenzy,” but it’s coming. You’re certainly not clairvoyant – no more than anyone else. But you’re an extremely well-experienced & well-seasoned investor that simply knows what’s inevitably bound to happen. Many thanks for your warnings to the “little guys.” Everyone needs to be prepared, as does their portfolio.
…From Jeff’s Friday essay, Jeff Clark Trader member Jack agrees with Jeff’s analysis…
I’m sure Jeff’s technical analysis is rock solid. I just think “the other shoe” is going to fall because of the shutdown. It just seems logical that with so many small businesses declaring bankruptcy, banks will eventually suffer – unless there’s a bailout I don’t know about.
…And finally, Delta Report members Bud and Naz leave us with their own insight in response to Jeff’s essay on silver…
Well, Jeff, I haven’t been doing this for long and I put my belief in your judgment. But, you’ve lately seemed as perplexed as the rest of us. I think politics have way too much to do with the unpredictability of the marketplace, especially since October.
When gold is sitting at the bottom, tech is all over the place, banks are sitting fairly still, and you’re making a few tough misses, it tells me that our nation’s investors don’t know what to do with these “never before in our history” situations.
When there was hope of a presidential transition, the market broke through. I don’t know what that means. But I do see the cause/effect laws in place. Hopefully, early January will bring us easier speculations. Yours truly.
Hi Jeff, I’m reminded of a famous quote by John Templeton, “Bull markets are born on pessimism, grow on skepticism, mature on optimism, and die on euphoria.”
There is no bull side or bear side to the market, just the right side. We all hope to be on the right side more often than not.
Thank you, as always, for your thoughtful comments. We look forward to reading them every day. Keep them coming – and send us any questions – at [email protected].
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