The Irony Behind the Coming Bitcoin ETF

“Bitcoin is going to $1 million… The ETF launch will take it there.”

That’s a summation of Bitcoin sentiment at the moment, as traders eagerly await the SEC’s approval of the first Bitcoin spot ETF in the coming days.

Oh, the irony…

Wasn’t Bitcoin created to sidestep the suits on Wall Street?

And isn’t Bitcoin already institutionalized?

It’s surreal how many Bitcoin enthusiasts are relying on institutions now. But this is the way of the hype life cycle. It even affects the diehards.

Real bitcoin maximalists find the upcoming halving much more important than the ETF in the long term.

(Each Bitcoin halving cuts the creation rate of new bitcoins in half. So miners have to work twice as much to earn the same reward.)

The hype is just the cream on top.

After all, institutional interest will never substitute the importance of gradually reducing the available supply of Bitcoin.

So all of the excitement about Bitcoin reaching new heights because of an ETF launch is astounding.

It’s been institutionalized since the day the Chicago Mercantile Exchange (CME) launched its futures product in 2017.

And since then, more and more products have come online that have given investors direct and indirect access.

That’s not to say there won’t be technical differences when a new spot Bitcoin ETF becomes available.

For instance, ProShares Bitcoin Strategy ETF (BITO) doesn’t give you direct ownership of bitcoin but rather bitcoin futures.

But in the case of Grayscale Bitcoin Trust (GBTC), I’ve yet to hear a plausible reason why the new ETF will be such a great upgrade.

You can already buy GBTC in your 401k. And it does provide direct ownership, avoiding the hassle of digital wallets.

The real point is being missed.

And it’s important to understand because it will determine whether you buy at the peak or the trough.

This coming ETF is not important because it makes Bitcoin a household name all over again.

It’s because of the avalanche of marketing, white papers, and “redefining” of asset allocation models that’s coming.

Institutions will try to ram the ETF into passive portfolios far and wide. And this time, the name “BlackRock” will be stamped on all the marketing materials.

Financial planners and wealth managers have cover if the ETF goes south. After all, BlackRock told them to do it. And they’re smart.

So an ETF will create more hype on top of the existing hype.

And when there’s hype, people can get drawn in at the worst possible time.

But I understand the math.

The cascade of inserting the “brand-name” ETF into client portfolios will create more demand for Bitcoin and push prices up.

But make sure you understand the risks.

Let’s say the SEC decides to postpone the ETF announcement into March, for instance. It could happen.

Prices could quickly retrace about a month’s worth of gains.

And it seems like at least some large players have used this 66% runup in Bitcoin prices (since the lows in October) to hedge their bets or take profits outright.

The chart below shows part of a model that monitors the spread of Bitcoin prices across its various exchanges.

Bitcoin’s price can vary across these exchanges. But most of the time, the price differences are just noise until this happens:

The lower panel looks like a seismic reading at the onset of an earthquake.

It shows how the price difference between Coinbase and Kraken started to violently gyrate right as Bitcoin began to plummet -9.25% in just a little over an hour.

Someone hedged on January 3. And that someone was big enough to temporarily dislocate the prices between the exchanges.

This happens because when large players are on the move, they tend to do it on Coinbase.

And this kind of “BTC earthquake” happens almost every time there’s a significant move.

So to play this in the short term, I would simply use yesterday’s highs (around $45,500) as a buy stop order.

(A buy stop order tells your broker to buy a security only if the price of the security reaches a specified price. In this case, if Bitcoin’s price rises above those highs, it could be the start of a larger breakout.)

That’s the short-term picture.

What about the long-term picture, which is ultimately more important?

The ETF launch will undoubtedly have portfolio managers and analysts scouring for insights to sell to the public.

And one insight that will probably get airtime is that Bitcoin can be viewed as both a currency and a commodity.

Here’s what Larry shared with Currency Wizard subscribers recently:

You’ve probably heard of the term “digital gold” to describe Bitcoin. Except it’s more like digital silver…

As soon as COVID turned the world upside down, bitcoin’s correlation to metals – particularly silver – leveled up. And that connection has stayed higher for three years now…

The relationships that make gold and silver move, like lower rates, are influencing Bitcoin as well. The most recent evidence appeared just last quarter. Bitcoin rallied 56% as interest rates plummeted.

Of course, some people dismiss Bitcoin because of its perceived volatility. But you can’t look at volatility without seeing the rewards it can bring.

Since 2020, based on reward vs. risk, bitcoin is almost two times ahead of gold and three times ahead of silver.

Though it’s a bit tongue-in-cheek, we call this the “gray hair index.”

It’s a snapshot of how much risk we need to take on to get these returns. The lower the measure, the more gray hairs you might end up with – and vice versa.

Institutional asset managers use this kind of analysis to determine appropriate allocations. And based on the gray hair index, I suspect a Bitcoin ETF will definitely entice more than a few managers.

Ultimately, Bitcoin’s risk-reward setup relative to traditional asset classes will be just too high to pass up.

Regards,

Eric Shamilov
Analyst, Trading With Larry Benedict