A few weeks ago, I noticed that the Grayscale Bitcoin investment trust, $GBTC, was trading at a much smaller premium than normal. It's not structured as an etf, so its market price doesn't perfectly track the price of bitcoin. Instead, it normally has a significant (20-60%) premium, reflecting excess demand for the trust. It's one of the few funds that tracks the price of bitcoin on the market right now, and investors are looking to get exposure prior to the ETF decision.
The GBTC premium contracted in anticipation of the Winkelvoss ETF ($COIN) decision on March 11. This makes sense - if an ETF were to be created efficiently tracking the price of bitcoin, the trust's premium would go to 0. So the GBTC premium could be interpreted as the inverse probability of the ETF being approved.
So when the premium was in the single digits, I snapped up a few thousand worth of GBTC at $108, imagining that the Bitcoin price would run up prior to the ETF. My reasoning was as follows:
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Scenario 1. Winkelvoss ETF approved. Bitcoin moons, 300m in new capital flows in, it goes to $2000+ within 6 months. Does GBTC track the price? Yes, the premium goes to 0 and it starts to follow it closely. Why does the premium not go negative? Because Grayscale has filed to turn their trust into an ETF - so if $COIN is approved, if follows that $GBTC would also be approved, and eventually it would track BTC perfectly. Probability: ~40%.
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Scenario 2. Winklevoss ETF rejected. Bitcoin price drops. But not by much - maybe to ~$1000. Remember, there are two more ETF decisions pending. And they have some advantages when compared with $COIN, although I won't go into the details. There's far too much latent demand and enthusiasm for the asset for it to drop well below $800. So if BTC is at 1000 and my entry price was $108, and the premium expands again, I'm unlikely to lose money on this. I have a margin of safety.
Eventually a bitcoin ETF will be approved, even if it's not Winklevoss. The premium will eventually go to 0. That's why I got in when it was low, at 10%. All bitcoin had to do was appreciate by more than 10% prior to the ETF decision and I'd be safe. Right now I'm up 29%, GBTC could be hit hard before the ETF. Either way, I have a cushion.
This post isn't meant as a brag, it's meant to go into detail on how the market can be inefficient and how this can be exploited. Would I recommend GBTC today? No, as the premium has expanded again to 17%. Although, the 3 ETF decisions are an asymmetric risk/reward proposition. The downside is minimal, and the upside is extreme, although the odds are still less than 50% in my estimation.
Would I have been better off buying pure bitcoin rather than GBTC? Marginally so. However fucky exchanges means I couldn't execute a transaction like that immediately. Coinbase needs to get their act together.
For all the bitcoiners out there - I also have a sizeable stake in btc and several altcoins in cold wallets, don't flame me for buying a centralized asset.
Submitted March 07, 2017 at 06:49AM by isrly_eder http://ift.tt/2n146Zu
