Bitcoin has always been of huge interest to me since I first discovered it in 2017. Given recent news events, I thought it was worthwhile to write an article on it. Yes, I am not Michael Saylor or Michael Novogratz, but I think I can provide some interesting context as to why you should be following Bitcoin. To keep this article brief, I will give a quick history lesson on Bitcoin, what makes Bitcoin special and then talk about the Bitcoin ETF that the SEC recently approved.
Why the U.S. Government Hates Bitcoin
I believe governments are extremely inefficient money allocators. The government recently reported spending an eye-popping $510 billion from October 2023 through December 2023, with the U.S. national debt recently rising to $34 trillion for the first time. In addition, a new $886 billion defense policy bill that got large bipartisan approval was just signed into law. I am not going to go into greater detail why I believe these debt levels cannot be maintained and my disdain for U.S. intervention abroad in some scenarios, but I do want to showcase that there is a contrast between what the people want and what government spends money and time on.
Important figures in our society from Elizabeth Warren to Jamie Dimon have called buying Bitcoin similar to “buying air” and have called for the government to “close it down.” Quite strong words to use and is largely due to the fact that it challenges the traditional financial system. What I would like to note is that we have actually experienced a similar instance from our government trying to ban a certain commodity from the ordinary citizen: gold. In 1933, the president at the time was Franklin D. Roosevelt who is largely known by people today for the launch of the New Deal, the president who had Polio and the one who entered the U.S. into World War II. He is the president who decided to ban gold. To keep it short, at the time, the U.S. used the gold standard for its currency, but this all changed during the Great Depression. Via Executive Order 6102, FDR basically told citizens “all hoarding of gold coins, gold bullion, and gold certificates” was forbidden as the federal government tried to increase federal spending to stimulate economic growth. Those who opposed could face up to ten years in prison and a fine of double what they had in gold.
That is the quick history lesson that I wanted to share. It shocks me how many Bitcoin holders have no clue about this event, given how much the past can tell about our future. Whether it could be potentially easier or more difficult to ban Bitcoin in the United States is truly up for debate. One side can say that given that Bitcoin transactions can be traced more easily than physical gold, it is easier to ban. Some places like the U.S. and EU have also enacted regulatory efforts to make it easier to trace who has a crypto wallet and who is buying the currency. On the other hand, given the decentralized nature of Bitcoin, it may be extremely difficult. It has not stopped people in China to continue using its peer-to-peer payment application and I would assume most Bitcoin holders are technologically savvy enough to find other methods to get access to digital currencies. Whether a tax or a complete ban will be more effective for the U.S. government at reining in Bitcoin is up for debate. What needs to be noted is that the fight against Bitcoin by the government resembles closely to what George Orwell’s 1984 feared: a totalitarian government that suppresses the people through its absolute control. I am not comparing the entire U.S. government to a totalitarian one, but I do want to illustrate how we have seen efforts by our government to restrict power to the people and what people want.
Is Bitcoin a Risky Asset?
There are a lot of skeptics that believe Bitcion has no value for society and should be seen as a risky asset to hold. To that, I will try and defend Bitcoin. Do I believe Bitcoin is volatile? Depending on the timeframe used, potentially. But is it risky? I would have to say no to that. Bitcoin exhibits proof of work, not proof of belief. It is able to run 24/7 like any bank that is entirely decentralized so no single and small group of entities have power. That is what Bitcoin is backed by. In the United States, we are fortunately able to have the right to buy something we find valuable and hold onto it. If you heard last month, the market capitalization of Bitcoin recently exceeded that of Berkshire Hathaway. A huge accomplishment for supporters of Bitcoin and showcases that free market participants will continue to hold onto things they find valuable. Again, what they find valuable is that Bitcoin is valuable in that it is proof of work, not proof of beliefs as skeptics say.
In addition, it is important to bring up what makes bitcoin different from fiat currency. Ever since Nixon delinked the USD to gold, most of the world’s money has basically been floating currencies. Therefore, since the USD is the world’s reserve currency, any monetary policy that the U.S. conducts has huge implications on other nations, especially those in developing nations. We have seen how the Federal Reserve pumped more than $5 trillion of money supply into the economy since the pandemic as the government tries to pass it off as money. Again, nothing is backing the USD but as individuals, we have to just accept whatever those in power do to the money supply and go along with it. These demand and supply mechanisms utilized by fiat are abysmal and there many instances of fiat currency failures to point to where governments have hurt its citizens, from recent events like the Zimbabwean dollar in the early 2000s to the Turkish Lira in 2022. In addition, looking at the return curves of both Bitcoin and US treasuries should tell an easy story of which is risky and which is not. For US 10-year Treasuries, the cumulative return from 2013-2023 was about 9%. Bitcoin in that same time period is a 5569% return and has significantly outperformed the US 10-year Treasury on shorter timeframes. The threat of inflation has caused holding cash or treasuries as not safe and the volatility that comes with Bitcoin should be largely ignored if you can take a more long-term view of the value that Bitcoin holds, both in terms of price and practical application. If anything, looking at this, the USD is backed “by air” to me, which is what policymakers and detractors of Bitcoin will say about Bitcoin.
News on Bitcoin ETF
This is quite big news as it has now allowed for more institutional investors to gain access to Bitcoin. Before, Bitcoin was largely for the rich or investors who would turn to Microstrategy, as an example, as a proxy for holding Bitcoin, given that 90%+ of its market capitalization derives from bitcoin holdings. Now, analysts are predicting a new bull market for Bitcoin as huge increases in the inflow of new funds into the Bitcoin ETF are being underway. What I am most curious about is what this means for Microstrategy and closed-end fund GBTC.
Microstrategy is run by Michael Saylor and was largely seen as a great way of getting Bitcoin exposure. It is a software business, but what it really is known for is its large amount of Bitcoin holdings. However, it has been called out by fundamental traders and analysts as being extremely overvalued compared to Bitcoin and seen as paying too much of a premium for getting exposure to Bitcoin. Interestingly enough, despite the huge short interest on Microstrategy by traders, it recently popped in the last couple of months due to a short squeeze. What the Bitcoin ETF introduces now is possibly a lessened appeal towards using Microstrategy as a proxy investment. Now, it could also be possible that the rally in Bitcoin due to the introduction of the ETF may be able to offset any reduction in the premium and help its ability to keep on borrowing against its holdings to buy more Bitcoin. Whichever result happens, this ETF introduction could mean Microstrategy stock may start to finally converge to book value.
Besides Microstrategy, Grayscale’s bitcoin fund (GBTC) has recently just been priced at par to its NAV value for the first time since February 2021. Basically the inverse of what Microstrategy’s stock price was, GBTC was always trading at a steep discount as a closed-end fund. Closed-end funds lack redemption mechanisms that do not allow for arbitrage to occur. Now that the Bitcoin ETF has been introduced with lower fees and an easier means for investors to acquire Bitcoin, it will be interesting to see if investors decide to move towards the Bitcoin ETF, especially since GBTC charges a 1.5% yearly fee.
Hopefully, I gave a nice summary of these current events on Bitcoin and look forward to making more articles!
Sources
Biden Signs $886 Billion US Defense Policy Bill into Law | Reuters, www.reuters.com/world/us/biden-signs-886-billion-us-defense-policy-bill-into-law-2023-12-22/. Accessed 19 Jan. 2024.
“Executive Order 6102-Forbidding the Hoarding of Gold Coin, Gold Bullion and Gold Certificates.” Executive Order 6102-Forbidding the Hoarding of Gold Coin, Gold Bullion and Gold Certificates | The American Presidency Project, 5 Apr. 1933, www.presidency.ucsb.edu/documents/executive-order-6102-forbidding-the-hoarding-gold-coin-gold-bullion-and-gold-certificates.
“Grayscale’s GBTC Discount Closes to Zero for First Time since February 2021.” Yahoo! Finance, Yahoo!, finance.yahoo.com/news/grayscale-gbtc-discount-closes-zero-154442259.html. Accessed 19 Jan. 2024.
“Historical Returns on Stocks, Bonds and Bills: 1928-2023.” Welcome to Pages at the Stern School of Business, New York University, pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/histretSP.html. Accessed 19 Jan. 2024
JeffCoxCNBCcom. “U.S. Deficit Tops Half a Trillion Dollars in the First Quarter of Fiscal Year.” CNBC, CNBC, 12 Jan. 2024, www.cnbc.com/2024/01/11/us-deficit-tops-half-a-trillion-dollars-in-the-first-quarter-of-fiscal-year.html.
“M2.” FRED, 26 Dec. 2023, fred.stlouisfed.org/series/M2SL.
MSTR Microstrategy Incorporated Stock - Share Price, Short ... - Fintel, fintel.io/ss/us/mstr. Accessed 19 Jan. 2024.
Partz, Helen. “Bitcoin Market Cap Overtakes Berkshire Hathaway, Soars Past $800B.” Cointelegraph, Cointelegraph, 4 Dec. 2023, cointelegraph.com/news/btc-market-cap-passes-berkshire-hathaway.
No comments:
Post a Comment