By Kevin Muir
[biiwii comment: man, Kevin sure does come up with some disturbing photos!]
I have long lost any tiny shred of respectability in terms of my bitcoin calls. Not only was I the idiot who passed on Bitcoin at $5 (My Great Bitcoin Bungle), but I have steadily expressed apprehension about jumping aboard the world’s greatest bubble, ooops, sorry – bull market.
Now before you dismiss me as some ancient out-of-touch finance guy who doesn’t get it, remember that I was mining bitcoins and arbing between exchanges before most of Wall Street had ever heard the word blockchain. Yet that doesn’t stop me from being the knob who missed one of the greatest wealth generation opportunities since Florida land went on sale in the early 1920’s.
For all my Bitcoin-loving-readers who find themselves slowly clenching their fists as they read my introductory paragraphs, please don’t stop reading. Regardless of my skepticism, I think I might have some value-added insights that those of the more bullish persuasion might have missed.
The other day one of my hedge fund pals sent me a note with a simple couple of questions;
“When bitcoin futures are listed, how well will they trade? And more importantly, will it trade at a premium or discount to fair value?”
So at the risk of embarrassing myself with yet another terrible bitcoin call, here it goes; Bitcoin futures will trade like garbage, and when they do trade, it will be at a discount.
That’s pretty well the exact opposite of consensus. Most pundits believe that listed Bitcoin futures will allow institutions, who were previously barred from owning an unregulated asset, to come flocking into the market, and drive Bitcoin to new highs. This supposed new huge demand will result in a deep liquid futures market, with demand pushing Bitcoin futures to premiums to fair value.
Well, I just don’t see it that way. The idea that there is this huge untapped institutional demand is a pipe dream. Yeah, I am sure there are a few accounts who would love to buy Bitcoin but their charter prohibits them from investing in unlisted assets. They might use the new futures, but most institutions are not going to come rushing into this asset class simply because there is a listed security.
Think about how most institutions work. Asset shifts go to committee. They debate it, argue about the fundamentals. They write reports about their conclusions. And then they make the change.
How are these pension funds, endowments, and other serious institutions going to justify owning Bitcoin? The fact that it is not listed is only one of a whole series of problems.
Bitcoin demand from institutions is greatly overstated. Especially over the short run. Maybe eventually a Bitcoin allocation will be commonplace in every pension fund, but the idea that simply listing the futures will open up a whole new wave of demand is hazier than a Vancouver grow-op house party.
I have given up predicting when this bull move might take a break (there, “bull move” – that’s a more diplomatic way for me to word it). This run has been extraordinary. No other way to describe it.
Bitcoin bulls will tell you that it is so extraordinary because it is such a revolutionary technology. And believe it or not, I agree with this statement. Bitcoin, and more importantly, blockchain has the potential to change the world.
Just like 1999 – but that’s not all bad
In 1999, I distinctly remember the technology bulls making fun of the skeptics, claiming they simply did not understand how revolutionary the internet was going to be. And this debate was made all the worse by prominent bears making outrageous claims.
Yet I think the current Bitcoin situation is remarkably similar to the 1999 DotCom bubble.
Was the internet a revolutionary technology that forever changed the world? For sure. No doubt about that.
Did investors in the DotCom equities in 1999 capitalize on this revolution? Not a chance.
There is a difference between being optimistic about a technology and being bullish on the valuation of that technology.
I don’t want this to turn into a post debating the pluses and minuses of bitcoin. Surely there has been more than enough digital ink wasted on that subject.
But I do feel that, as an old school markets guy, a warning about the supposed bitcoin demand from the new listing of the futures is in order. Bitcoin is a phenomenon driven mostly by younger individuals. All you need to do is look at the days when bitcoin rallies the most. The best time to trade bitcoin is on the weekend. That’s not an institutional market. And it’s going to take a lot more than a listed futures market to change that.
And in case you bulls aren’t feeling worried enough, Barrons slapped it up on the cover this weekend. Nothing worse than the Barrons curse.
So yeah, I guess I am not optimistic about bitcoin’s near-term trajectory. Don’t bother emailing me all your “you don’t understand Bitcoin” comments. I obviously don’t get it otherwise I would be long. But that doesn’t stop me from observing that maybe sentiment has gotten a little ahead of price.
The real worry
Here is my real value-add for this article. Many bitcoin bulls are buying because they want to own an asset that is no one’s liability. And yeah, I get it.
But if you store your newly purchased bitcoins at an exchange, let me break it to you – you own something that is definitely someone’s liability. You are in essence long a promise from your exchange to deliver bitcoin, not bitcoin itself.
I don’t have any clue about the financial position of these various exchanges. Nor do I understand the legal obligations that they operate under. I just know that this is an unregulated, private market with no government supervision. You might say, “good – the government ruins everything anyhow.” Well, how do you think the Mt. Gox Bitcoin holders feel about the lack of government oversight? From www.cryptocoinsnews.com:
In 2014, Mt. Gox, once the largest bitcoin exchange in the world, filed for bankruptcy. At the time, Japanese creditors requested Mt. Gox to return the equivalent amount of their funds stored in bitcoin in Japanese yen. Since then, the price of bitcoin has risen by 70-fold, and former Mt. Gox CEO Mark Karpeles is expected to take the majority of the profit from the bankruptcy proceedings.
In July, Karpeles attended a court hearing and pleaded not guilty to charges on money laundering and embezzlement, for his involvement in the loss of approximately one million bitcoins, which were worth $400 million during the period wherein the Mt. Gox bankruptcy was filed.
Over the past three years, from 2014 to 2017, the price of bitcoin has increased exponentially, from around $400 to $7,000, by 17-fold. During the investigation into the Mt. Gox bankruptcy from 2014 to 2016, 200,000 bitcoins were recovered and with that, Karpeles was requested to proceed accrediting creditors of Mt. Gox with the recovered bitcoins.
However, after a strange turn of events, it turns out that creditors of Mt. Gox, or former bitcoin traders on the Mt. Gox exchange, are set to be credited with Japanese yen equivalent to the value of bitcoin in 2014.
Paul Wasensteiner, a Mt. Gox creditor, told CCN that creditors were not made aware that their claims were limited to a maximum value of $480 and that the bankruptcy would settle the proceedings based on the price of bitcoin three years ago. Creditors have expressed their concerns over the process of the Mt. Gox bankruptcy, and the possibility that Karpeles, who is directly responsible for the loss of $7 billion in funds, might take away $859 million from the $1.3 billion that has been recovered.
Consequently, subsequent to the completion of the payout of Mt. Gox bankruptcy proceedings to its creditors, Karpeles will be left with hundreds of millions of dollars worth of bitcoin as profit, for his direct involvement in the loss of nearly $7 billion worth of bitcoins within a two-year span.
“When it’s all sorted out, Karpeles would pretty much get [the] vast majority” of the extra value, Kolin Burges told the WSJ, a creditor who held 311 bitcoins at Mt. Gox. “So that seems incredibly unfair.”
For creditors like Burges, their previous funds in bitcoin that were stored on Mt. Gox will be processed in Japanese yen, at the same value it had been in 2014. Hence, instead of receiving more than $2.1 million, Burges will receive less than $130,000 for his 311 bitcoins, at a price of $400.
“[I]n the case these are sold, I do not believe it would realistically fetch any kind of value high enough to make this an actual issue,” said Karpeles, denying any wrongdoing in regards to the Mt. Gox case and the theft of user funds.
On paper, the company of Karpeles, called Tibanne, owns about 88% of Mt. Gox as per the WSJ. After the bankruptcy filings are settled, Mt. Gox will be left with a surplus of $977 million worth of bitcoins. Out of that, 88 percent will be granted to Karpeles and in the end, after losing more than $7 billion of user funds, Karpeles will take home $859 million for his role in the demise of Mt. Gox.
So here is a little pro-tip for all you bitcoin holders. Learn how to “take delivery.” Move your long from your exchange to a private wallet. It’s not easy, but it’s not that hard. Who knows, someday you might end up thanking me for that advice.
Thanks for reading,
PS: one of my buddies, and ardent bitcoin bull, Tony Greer, was spouting on about how gold was headed down to $845 in the coming quarters. Well, I couldn’t resist. I made a bet that bitcoin would be halved before gold was down a quarter. The wager? One beer – Duke & Duke style. Will report back to who wins this epic battle between generations (actually Tony is a Gen X, but I think almost everyone rooting for him is under 30)
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