What is Going on with Bitcoin?

It is hard not to notice the dramatic rise in the price of Bitcoin. What is going on? It is a simple question with complex answers. In this blog post I will do my best to shed some light on the subject. I will start by sharing my history with Bitcoin. Although not a forecast, I will describe where I think things are going.

In 2013 I attended Inside Bitcoins, a conference in New York City. I expected the attendees to be mostly young. I was 65 at the time. To my surprise, the audience was quite diverse, old and young, male and female, white and people of color. The common attitude was one of enthusiasm for crypto. I talked with a lot of people and exhibitors. I got hooked. The idea of a digital future for currency and banking made complete sense to me.

I left the conference with a twofold Bitcoin strategy. First, I would purchase Bitcoin every Monday morning at then little known coinbase.com. Every week the funds would be withdrawn from my bank account and deposited at Coinbase. I started at $100 per week but later upped it to $250 per week. The dollar-cost-averaging approach worked. I purchased some at more than $800 and some at less than $400 with an average cost of about $600. As of this writing Bitcoin was trading at $61,000.

The second part of my strategy was to be a Bitcoin miner. The miners are what makes the blockchain and Bitcoin operate. Rather than purchase the required specialized crypto-optimized hardware, I used cloudhashing.com. The details of how this worked were complex and I will not bore you with them. The competitor to cloudhashing.com was the price of Bitcoin – if Bitcoin fell, cloudhashing was not desirable. If the value of Bitcoin rose, the mined Bitcoin became more valuable. I did not put my retirement savings into Bitcoin, but I was making an investment to put some money where my mouth was. At the time, I saw Bitcoin as analogous to investing in Cisco, Amazon, eBay, Google, and others in the early days of the web.

The $250 per week strategy from 2013 to 2017 turned out to be quite successful. In 2018, I sold half of what I had accumulated. I made the sales weekly. The price at first was $4,000. Then the price rose to $8,000 and I sold more. The last batch I sold at $20,000. I paid the capital gains tax even though everyone knew at the time the IRS was clueless. I continue to hold the other half. My net investment on the remainder was zero.  I made a philanthropic gift to a healthcare organization at the end of 2021 using Bitcoin. The cloudhashing strategy turned out to be a loser. The company, cloudhashing.com, folded. Fortunately, I did not put much money into it.

In 2017 I made an investment in FundersClub, a specialist at investing in startup companies. Investing in startups is risky, but I knew FundersClub could pick them better than I could. Later in 2017, FundersClub made a significant investment in startup Coinbase. My average cost per share of the shares after they were transferred to from FundersClub was $8.25. Coinbase shares traded at above $200 this week and the market cap of the company is nearly 50 billion dollars. Coinbase is playing a major role in cryptocurrency, and I see that as being the case long term. In 2013, the SEC sued Coinbase. Also in 2013, Coinbase sued the SEC. Both cases are complex, but I am betting on Coinbase. They have a strong management team and a solid governance structure. They are nothing like FTX was.

 The most important part of the Bitcoin story is the Bitcoin Spot ETF. In 2013, the first Bitcoin spot ETF application was filed by the Winklevoss twins, the founders of Gemini. I have my Ethereum holdings with them. They sought to launch the “COIN” ETF. From 2017 to 2021. several other companies, including the Blackrock powerhouse, submitted Bitcoin spot ETF applications. The SEC consistently rejected them, citing concerns about market manipulation, fraud, custody, and investor protection.

 In October 2021, the SEC approved the first Bitcoin futures ETF, allowing investors indirect exposure to Bitcoin price movements through futures contracts. In January 2024, after years of rejections, the SEC finally greenlit 11 spot Bitcoin ETFs in a historic move. This decision came after significant lobbying efforts from the industry and increased regulatory confidence in the maturing market.

As of February 27, 2024, there are 11 approved spot Bitcoin ETFs in the US, with several more potentially waiting for approval. The 11 include ARK 21Shares (NYSE: ARKB), Bitwise (NYSE: BITB), Blackrock’s iShares Bitcoin Trust (NASDAQ: IBIT), Franklin Bitcoin (NYSE: EZBC), Fidelity Wise Origin Bitcoin Trust (NYSE: FBTC), Grayscale Bitcoin Trust (NYSE: GBTC), Hashdex (NYSEARCA: DEFI), Invesco Galaxy (NYSE: BTCO), VanEck Bitcoin Trust (NYSE: HODL), Valkyrie Bitcoin Fund (NASDAQ: BRRR), and WisdomTree Bitcoin Fund (NYSE: BTCW).

 These ETFs offer investors a regulated and transparent way to gain exposure to Bitcoin through traditional financial institutions like brokerage firms. The term “spot” in Bitcoin spot ETF carries significant meaning within the world of cryptocurrency investing. A spot Bitcoin ETF holds actual bitcoin as its underlying asset. This means when you buy shares in a spot Bitcoin ETF, you are indirectly gaining exposure to the ownership of real Bitcoin.

 In contrast, futures-based Bitcoin ETFs do not own Bitcoin directly. Instead, they invest in futures contracts, which are financial agreements to buy or sell Bitcoin at a future date and price. The “spot” price of Bitcoin refers to the current, real-time market price at which you can immediately buy or sell Bitcoin.

 A spot Bitcoin ETF aims to track this spot price as closely as possible. This means its value will fluctuate in line with the actual price of Bitcoin in the market. The advantages of “Spot” include:

1. Transparency and Simplicity: Investors can understand the value of a spot Bitcoin ETF simply by looking at the current spot price of Bitcoin. It’s more straightforward and intuitive than futures-based ETFs.
2. Reduced Risk: Some futures-based ETFs were prone to additional risks associated with the futures market, such as the potential for price discrepancies between the futures contracts and the underlying spot price. Spot ETFs mitigate this risk.

In summary, the “spot” in spot Bitcoin ETF highlights a direct connection to the real-time price of Bitcoin with actual Bitcoin backing the investment. This offers investors a simpler, more transparent, and potentially less risky way to gain exposure to Bitcoin through a regulated investment vehicle. It’s difficult to determine the precise combined Bitcoin holdings of all 11 ETFs due to the dynamic nature of the market and the fact not all ETFs disclose their holdings in real-time. However, estimates suggest the total holdings of these ETFs could be in the range of 100,000 to 200,000 Bitcoin as of February 27, 2024. At $60,000, the size of the ETFs is $62 billion to more than a trillion dollars.

When a client buys a Bitcoin ETF, the firm they buy it from purchases the corresponding Bitcoin and places it for holding with a custodian. Most of 11 have chosen Coinbase as their custodian. This in part explains why Coinbase has risen above $200 per share.

The subtlety of all this is the Bitcoin purchased to back up the ETF has taken that Bitcoin out of the total fixed supply of Bitcoin. Purchasers of Bitcoin ETFs can sell it anytime they want but many believe, myself included, the purchases were not made to trade. They were made to add to the asset mix of their portfolio. Investment advisors have been slow to start recommending Bitcoin ETFs, but I believe interest from clients is growing. A typical asset mix of an investor’s portfolio might be 1, 2, or 3 percent in Bitcoin. There are many variables to be precise, but the Investment Company Institute (ICI) estimates the total assets under management (AUM) in the US mutual fund and exchange-traded fund (ETF) industry at over $46 trillion as of January 31, 2024. I believe the possibility a small percentage of the huge investment portfolios may become Bitcoin is what is behind the rise in the price of Bitcoin.

While this story explores the world of Bitcoin, it is not in any way intended to provide investment guidance. Please conduct your own research and seek professional advice before making any investment decisions.

Read more about Bitcoin in Reflection Attitude – Current, Past, and Future.

Note: I use Gemini AI and other AI chatbots as my research assistants. AI can boost productivity for anyone who creates content. Sometimes I get incorrect data from AI, and when something looks suspicious, I dig deeper. Sometimes the data varies by sources where AI finds it. I take responsibility for my posts and if anyone spots an error, I will appreciate knowing it, and will correct it.