August 2023: Bitcoin For BlackRock
Opportunity to front-run BlackRock's spot bitcoin ETF
"Bitcoin is the only economic entity in the world where the supply is unaffected by the demand." – Bill Miller III
Firstly, I’d like to apologise for not writing in a long time. I’ve found myself unable to write anything as of late. During this period of silence, nothing has changed for me regarding my longer-term convictions, but the timeframe for a commodities bull run has been extended. It’s been a waiting game and, with the exception of MSTR’s appreciation, not much has happened on the upside for the portfolio so far this year.
Sometimes, when things aren’t going well, I find it easier to step back from the market for a while and do other things. There’s something to be said for this – it worked for me in the Covid crash, where I battened down the hatches, didn’t trade and started growing vegetables.
There has been a degree of disappointment with what has happened with energy, particularly Vermilion. It has been disheartening to have been up so much in August 2022 and then to have lost all the gains and then some. I made a couple of bad calls – Vermilion and Embark Technology – and on the back of these I’ve found myself questioning whether I should be writing a newsletter at all. But this has been intended as a learning experience and an investment diary first and foremost – and it’s past time I get back in the saddle!
For the time being, I’m going to aim to write just once a month to get my mojo back.
Performance
YTD: -9%
2022: +1%
2021: +10%
2020: +49%
2019: +51%
Something has happened
I said that nothing had happened, and it has felt for a long time like the calm before the storm, that we have been waiting for some major event that just hasn’t arrived.
But then something did happen – in the bitcoin space – BlackRock filed an application for a spot bitcoin ETF. And not only BlackRock, the world’s largest asset manager, but several other large fund managers also jumped aboard with their own applications. BlackRock CEO Larry Fink made media appearances in which he was singing bitcoin’s praises, and several major players in the industry have flipped pro bitcoin. This is a major event.
The SEC has so far only allowed bitcoin futures ETFs rather than spot bitcoin ETFs. Whereas a futures ETF holds only derivatives contracts, a spot-based product holds actual bitcoin and so creates demand on the bitcoin market.
On 19 July, the SEC accepted six applications for spot bitcoin ETFs from BlackRock, Fidelity, Invesco, WisdomTree, VanEck and Bitwise. The clock starts ticking on the SEC’s decision on whether to approve the applications once filings are published on the register – a 45-day deadline that can be extended up to 240 days, until March 2024, just before the next halving.
While the SEC has rejected many spot bitcoin ETF products in the past, the fact that it is BlackRock leading the charge has fuelled speculation that approval is likely. BlackRock may have found a way to address the SEC’s concerns raised on previous bitcoin spot ETF applications by including new agreements for fraud surveillance with ‘surveillance-sharing’ partner Coinbase.
Also, a ruling is expected soon on Grayscale Investments’ lawsuit with the SEC over the agency’s dismissal of its intention to convert the Grayscale Bitcoin Trust into an ETF. A Grayscale win would make it difficult for the SEC to deny BlackRock’s bitcoin spot ETF.
BlackRock’s record of ETF approval is almost unblemished: it has filed 576 ETF applications and been rejected once. It is therefore conjectured that BlackRock is so close to the SEC that the company would not file an ETF application if it believed it was not likely to gain approval.
If these ETFs are approved, it’s difficult to overstate what a bullish catalyst this is for bitcoin. BlackRock alone has $9.4 trillion in assets under management. A BlackRock bitcoin ETF would bring exposure to the asset to the traditional investor audience in a wrapper that could be easily digested by wealth managers, institutions and retail alike. A small percentage allocation in traditional portfolios would add huge demand for bitcoin on the market.
A sea change in institutional sentiment
Even if this round of ETF applications gets rejected, however, the BlackRock application still represents a sea change for bitcoin. Several of the largest asset managers turning pro-bitcoin is something we may not have expected so soon, and institutional adoption is needed to bring the asset mainstream and secure its place as a major alternative asset class.
In 2017, BlackRock CEO Larry Fink said that bitcoin was “an index of money laundering”. In a recent 2023 interview on Fox Business, however, he described it as “digitising gold”, as an “international asset”, an “advancement of technology” and even talked about “hope” in the context of bitcoin. Ironically he also said, “We don’t need custodians anymore”, which made me chuckle! It seems some of the big players have got around to doing the work!
The upside of BlackRock’s ETF
In late July, a forecast from Fundstrat garnered headlines for estimating that a spot ETF’s approval could cause bitcoin to reach $180,000 before the next halving in April 2024. The note by Funstrat commented that a bitcoin ETF could add an extra $100m in incremental daily demand for bitcoin, while the current net demand is about equal to the $25m of mining rewards per day, meaning the price would have to rise dramatically to meet an equilibrium between buyers and sellers.
I’m sceptical about a price move of this magnitude before the halving, as historically the major bull runs have been driven primarily from the halving cycles themselves and the supply shortfall the halving creates. However, a spot ETF approval would set things up tremendously for the halving in April 2024.
BlackRock alone manages $9.4tn in AUM. A hypothetical 1% allocation over time from BlackRock’s investors would therefore mean almost $100bn flowing into bitcoin and bidding for the small amount of available supply, meaning bitcoin’s market cap would rise by far more than $100bn. Most of the coins are held by long-term savers not interested in selling, with 69% of all coins not having moved in over a year. $100bn is around the net demand during the last bull market that took the price from $10k to $70k – although it seems highly unlikely that this much capital would flow in before the halving.
With an ETF approval prior to the halving, however, and the capital flowing in plus the frontrunning and buzz this would create, it might be possible to get within shouting distance of all-time highs before the event, and that would set up for the $180,000 price target and beyond under the new supply issuance regime. (Based on the past cycles, $180,000 is within the realms of possibility even without the spot ETF catalyst.) Combined with favourable macro factors, such as possible monetary easing in the second half of 2024, this could mean an even bigger bull market than last time.
I believe bitcoin is the best identifiable investment opportunity around at the moment, and it is going to be very difficult to pick something that outperforms it over the next two years or so. If you haven’t yet got around to properly researching bitcoin, I’d recommend it as time well spent – it’s still early before the 2024 halving. Bitcoin starts off looking like a scam – but then, the more research you do, the more bullet proof it appears. It seems Larry Fink has gone through the same journey!
The downsides of institutional adoption
Chief among risks of BlackRock’s ETF is risk associated with rehypothecation, the practice common among ETFs of lending out their assets. If BlackRock is to lend out its bitcoin, there would be risks to the ETF’s investors who effectively only have a paper claim on the bitcoin, and the fund would become a source of paper bitcoin creation.
Of course, it’s far better to own the real thing if you can – in self-custodied cold storage. Part of bitcoin’s appeal is that it is a self-custodied asset with no counterparty risk – but many in the traditional investment world will not be able to do this, unlike us, and so the BlackRock ETF will be a popular vehicle.
Introductory materials on bitcoin
Portfolio
Note: the bitcoin position was added into the portfolio – from existing holdings outside of the portfolio – at the end of March and the end of June. The positive performance year-to-date of that position has therefore not been recorded in the performance numbers.
Trades since the end of March:
Sold MEG, HME.V, EMBK, ARCH
Bought PSN.L
Added to MSTR
Final thoughts
MSTR, for my bitcoin exposure within a UK ISA (tax free account), has performed very well year-to-date, and this was my top stock pick for 2023. It looks like I’m going to win my annual bet with Eric once again!
As always, I wish you all the very best in the month ahead!
Timothy Lamb.
Written by Timothy Lamb
Blog: www.retailbull.co.uk
Twitter: @theretailbull
Disclosure:
The writer owns shares in the securities listed in the stock portfolio and WPM.TO at the time of writing.
Disclaimer:
This article is for informational purposes only, does not offer investment advice and does not recommend the purchase or sale of any security or investment product. Please see the full disclaimer on the About page.