Bitcoin

Ignoring the Fundamental Value of Bitcoin

The touts are out in full force exhorting anyone who will listen to buy more. I’m seeing plenty of silly comments like fundamental value doesn’t matter and so on.

 

“Laser Eyes” in the title refers to the latest evolution in the Bitcoin mania, laser eyes to $100,000 is what it means. The gains of late have been staggering, up 80% so far this year along with other eye popping results for whatever time frame you look at. Bitcoin Twitter is ecstatic. I’m sure the Bitcoin corner of whatever your favorite social media platform is equally ecstatic. The touts are out in full force exhorting anyone who will listen to buy more. I’m seeing plenty of silly comments like fundamental value doesn’t matter and so on.

If you’re at least 40, you’ve seen this sort of frenzy before. It is a behavior that repeats. The sentiment isn’t automatically wrong though. The actual internet, what it has become and how we use it has far exceeded the promise of the mid-90’s as the typical person understood it. It just so happened that almost all of the first batch of stocks were failures. A couple of people who I know personally and respect as being very smart tell me Bitcoin is the real thing, it will be the real thing it will do what the touts say. Of course that can all be true at a lower price from here. Some of the arguments for continued price appreciation have to do with it replacing gold, more companies/institutions adopting it for various uses maybe the way MicroStrategy (MSTR) has. If you care at all about Bitcoin you know some of the others too but those are just theories with price projections frequently based on nothing but extrapolation.

Just because extrapolation is often confused for analysis in the crypto world, doesn’t mean those guess will be wrong. They could be right. Right here, right now there is no way to know, only guesses. I’ve been saying all along that it could go to a bazillion like the touts say or it could go to zero and I still believe that. Zero is becoming less of a possibility but not impossible.

You might recall the mania in Bitcoin in late 2017/early 2018 which sent the price up to a little under $20,000 and the subsequent 80% correction. In the throws of that 80% corrections the touts were quick to say that the massive decline was totally normal for Bitcoin and that it will happen again. I am not seeing any else now saying that it can happen again, an 80% decline so I will say it, if 80% declines were normal when the last one happened then they are still normal now or at $60,000 or $80,000 or whatever.

I am still holding (HODLing) what I bought in December 2018 via the woefully flawed Grayscale Bitcoin Trust (GBTC). The only way to access it in brokerage accounts for now are these trusts, Osprey Bitcoin Trust (OBTC) just started trading last week, which can trade and premiums or discounts to NAV. When I bought GBTC I essentially paid $4.11 for about $3 worth of Bitcoin. That is an insane premium so the trade was very risky which is why I sized it at less than an IRA contribution. At that size the asymmetric opportunity of the value of my shares if it goes to several hundred thousand would be substantial while the pain of the loss of it going to zero would not alter our financial plan in the slightest.

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Frequently I’ve said, if you bought Bitcoin and it grows into a life changing piece of money, sell it and let it change your life. At this point GBTC is a very large position but it has a ways to go to be life changing and so I haven’t given any consideration to selling it yet.

A cautionary tale about the trust structure from just this week and OBTC. When the fund first started trading it was in the mid $50’s while the NAV was in the high teens. For the life of me, I don’t know why people were paying that kind of premium but they were and they still are for other vehicles with the same structure. Then late Thursday the price of OBTC came in somewhat, dropping from above $50 to close at $41.45 according to Yahoo Finance. Friday the price caved in. After it opened at $42.50 it immediately fell to the mid-$20’s and closed at $24.50 versus an NAV of $18.88 as reported by Osprey. So what happened? I’m pretty sure I saw a Tweet earlier in the week that Osprey’s institutional/accredited customers would soon have a window to sell their shares in the open market. I was unable to find any news of this on Friday so I can’t verify that the Tweet I saw was correct but that explanation makes sense. If you’re going to dabble via the trusts, you need to understand this dynamic and keep an eye out for when it might happen. As I said above, they are woefully flawed but they are convenient. Two ETFs launched in Canada this past week which has all of ETF News Twitter scrambling to figure out how this might impact a US launch.

This post is not intended to be an anti-Bitcoin rant. This is about how to stay unemotional, skeptical, engaged and informed so that risk can be managed properly. I don’t want to drink the Kool Aid, talk about new paradigms or fall prey to any of the other cultish behavior, I want to take advantage of the asymmetric opportunity and am willing to use a woefully flawed product to do it.