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Commentary: Lacking ETF options, investors overpay for bitcoin mania

Chuck JaffeChuck Jaffe ·

Most people wouldn’t pay two dollars for a dollar’s worth of gold or silver.

But investors in the only available public bitcoin fund are paying roughly two bucks for every dollar’s worth of the world’s foremost crypto-currency they purchase.

Bitcoin, of course, is no ordinary currency or commodity, which is both the potential attraction and danger to the Bitcoin Investment Trust (GBTC) and any proposed digital-currency funds.

Bitcoin has been pitched for at least five years now as the next great step in Internet and global commerce, a digital currency without borders or a central bank, run by the people who use it. The value of bitcoins is determined by the marketplace, and it feels like the market took some crazy pills in August.

Entering 2017, the price of one bitcoin was roughly $1,000; by Aug. 1, it was worth roughly $2,750. Less than a month later, bitcoin trades for about $4,250. That’s a 325 percent gain year-to-date.

It’s a move so strong that it smacks investors in the face begging “What are you waiting for?” which may explain why every day in August there have been more Google searches worldwide for “bitcoin” than for “Donald Trump.”

(Before anyone cries “fake news,” know that Trump wins the search-term battle in North America by a wide margin, but bitcoin won every other continent — and handily beat both Taylor Swift and the Chicago Cubs in the U.S. — and was wildly popular in places like Nigeria, Argentina and the Ukraine, among the world’s hairiest, scariest markets.)

Not many stocks, and even fewer funds come up in those searches.

Investors can, of course, buy bitcoin itself if they understand how and are willing to trade a virtual currency with well-documented dangers — from volatility to viability – on an unregulated exchange.

They can buy crypto-currency stocks, like First Bitcoin Capital (BITCF) , a penny stock that’s up 6,000 percent year-to-date, but which recently saw its trading halted until Sept. 7 by the Securities and Exchange Commission. Penny stocks and OTC Bulletin Board stocks are off the map for most investors, so bitcoin companies come from places marked “Here there be monsters.”

For investors wanting bitcoin without the risk of holding the currency or the nascent stocks, an ETF holding the digital currency is the logical solution.

Creating bitcoin ETFs, however, has been problematic.

The Winklevoss Bitcoin ETF (COIN) was rejected in March by the SEC. It was supposed to be the first true ETF to invest in “physical bitcoin,” meaning it would be structured like ETFs that buy gold bars and silver ingots to trade at the price of the precious metal. Of course, there is no such thing as “physical bitcoin,” not an insignificant problem.

If the Winklevoss name rings a bell, you know enough about the origins of Facebook to know that Cameron and Tyler Winklevoss — twins who attended Harvard and rowed in the 2008 Olympic Games in Beijing — claimed that Mark Zuckerberg essentially stole their idea for the business. The twins took their massive settlement and went whole hog for bitcoin.

Beyond trying to launch COIN, they run Gemini, the digital asset exchange that is working with the Chicago Board Options Exchange (CBOE) to start trading in bitcoin futures. Clearly, they won’t give up.

Neither will the fund industry. In the last few weeks, firms have registered several new bitcoin-related ETFs; the VanEck Vectors Bitcoin Strategy, REX Bitcoin Strategy, REX Short Bitcoin Strategy filings still need SEC approval, but continued filings will pressure the agency to find a solution.

Meanwhile, the Bitcoin Investment Trust — the first publicly traded bitcoin vehicle — technically is an “open-ended trust.” Grayscale, the fund’s sponsor, has periodically created new shares, but not since January when it sought to turn the trust into a full-fledged ETF.

As a result, the supply of shares hasn’t kept up with demand, so GBTC now acts like a closed-end fund. Where most ETFs (and traditional funds) trade at or near the net asset value of the assets they represent, closed-end funds trade at a premium or discount based on market sentiment.

Bitcoin sentiment is so strong that GBTC opened trading on August 25 trading at $767 per share, with the net value of the bitcoin represented by the shares standing at $385.

That means investors were paying roughly $2 to buy $1 worth of bitcoin. By comparison, the difference between the share price and the net asset value for a share of the SPDR Gold Trust (GLD) was less than half of 1 percent, meaning investors paid a dollar for 99.5 cents worth of gold.

The premium on gold, therefore, is pennies; on bitcoin, it’s so big that it dramatically reduces the chance of a long-term positive return. If bitcoin prices stabilize but investors cool off, GBTC shareholders could see the premium evaporate and take half of their money with it.

“GBTC is behaving most like a closed-end fund,” Ben Johnson, director of global ETF research at Morningstar Inc., said by e-mail. “The value of its lone ‘holding’ – bitcoin — is driven by the hopes and dreams of many a speculator who dares to believe that some fancy math will claim a seat next to incumbent fiat currencies as a widely used medium of exchange.”

(Note that Johnson put the quotes around the word ‘holding.’ Morningstar, the leading mutual fund research firm, includes no research on GBTC’s holdings. Where the GLD or SLV (the iShares Silver Trust) are both shown as having 100 percent of assets in the physical metal, the firm shows the Bitcoin Investment Trust as having zero percent of its assets in any holdings, precisely because there is no “physical bitcoin” to buy. Ouch.)

Bitcoin investing comes with plenty of concerns, not the least of which is that the SEC ultimately could decide to regulate digi-cash like securities rather than currencies. Even bitcoin bulls often argue about whether to treat bitcoin like a substitute for gold and silver, or as a global currency play.

For now, it’s a speculation. That’s not a dirty word, just a reminder to be careful.

Mark Yusko, chief investment officer at Morgan Creek Asset Management, is a self-proclaimed bitcoin bull who has moved clients into small positions in the crypto-currency through private funds for large investors. “I believe bitcoin is a winner,” he said, “but you definitely could wake up some day and be 30-, 40-, 50-, 70 percent down overnight. Real bitcoin ETFs could help, but no matter how you buy or trade it, bitcoin is going to be a pure-and-simple speculation for a long time.”

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   Chuck Jaffe is editor at RagingBull.com; he a nationally syndicated financial columnist and the host  of “MoneyLife with Chuck Jaffe” (moneylifeshow.com). He is a long-term investor and does no short-term trading of stocks, options or ETFs. You can reach him at chuck@ragingbull.com.

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