The remarkable rise in the dollar price of bitcoin continues, with the cryptocurrency up by over 1,000% in the past year to trade between $50,000 and $60,000 by late March. The price appreciation that has taken bitcoin to a nominal value over $1 trillion has brought renewed attention from banks.
Veterans of crypto trading are urging their followers to treat these late converts to the cause with disdain. Barry Silbert, the founder of Digital Currency Group – which bills itself as the most active investor in the blockchain sector – made his views clear in a tweet on March 21.
“It is truly mind-blowing just how wrong Wall Street was on bitcoin for the past five years. A $1 trillion asset class formed without any help or support from the incumbent players. Just remember that when they start flinging their crap crypto-exposure products at you,” Silbert said.
Morgan Stanley recently became the first major US bank to offer certain wealth management clients access to bitcoin funds, including Michael Novogratz’s Galaxy Digital.
Edging into crypto
Novogratz’s one-time employer, Goldman Sachs, has revived the cryptocurrency trading desk it put on hold in 2018 and is arguably edging into crypto structured product issuance with auto callable contingent notes based on the Ark Innovation exchange-traded fund (ETF).
That fund has Tesla as its biggest holding – the electric vehicle firm whose founder Elon Musk has rebranded himself “Technoking”, invested $1.5 billion in bitcoin, announced bitcoin will be accepted as payment and forced his chief financial officer to accept a new title as “Master of Coin”.
JPMorgan is also edging into the sector by selling baskets of stocks in companies with crypto exposure.
And a host of opportunistic investors, including Skybridge Capital founder and 10-day Trump White House communications director Anthony Scaramucci, are hoping for US regulatory approval for bitcoin ETFs.
Silbert is probably right to worry about the encroachment of Wall Street firms on the bitcoin investing turf where his Grayscale Investments is currently the world’s biggest digital asset manager, with more than $42 billion under management.
He may also have reason to fear the onslaught of Wall Street trading tactics on cryptocurrency incumbents. The Grayscale Bitcoin Trust (GBTC) is now the largest public holder of bitcoin and its effect on price movement is becoming more widely understood.
Bank of America analysts recently examined flows into the Grayscale trust and found that these tend to lead weekly returns in bitcoin prices as the fund takes on more exposure and pushes the price up.
Elon Musk has rebranded himself ‘Technoking’, invested $1.5 billion in bitcoin… and forced his chief financial officer to accept a new title as ‘Master of Coin’
The analysts noted that this is not some quirky feature of crypto trading, instead it is similar to a pattern often seen in commodity markets, where flows into gold and silver ETFs can push up prices by mopping up physical supply of the precious metals.
As GBTC’s assets soared by over 10 times last year – to around $32 billion now – it bought the equivalent of over 200% of the new supply of bitcoin in the fourth quarter of last year.
Demand for the fund was boosted by its status as the easiest way to gain bitcoin exposure for many investors. This in turn led Grayscale’s trust to trade at a substantial premium to the nominal value of its bitcoin holdings until late February, when it suddenly slipped to a discount that at times was 10% or more.
There were logical reasons for the shift, such as the expanding range of options for investors who prefer to take bitcoin exposure in a vehicle, with Canadian bitcoin ETFs now available, along with comparable exchange-traded products in Europe.
A shift out of technology stocks also put pressure on one of the biggest holders of GBTC, the Ark fund group run by Cathie Wood, which has the Grayscale fund as the second biggest holding in its Ark Next Generation Internet ETF (after Tesla – again) and may have scaled back when it saw its own outflows.
Soon after GBTC slipped to a discount to its net asset value (NAV) two financing moves set the online crypto community buzzing.
One was the announcement that Silbert’s Digital Currency Group will buy up to $250 million of GBTC shares, presumably to try to push the fund back towards its NAV (Silbert declined to comment).
The second was news that BlockFi, the crypto financial services firm, had completed a $350 million funding round that gave it a valuation of $3 billion.
Potential pitfalls
BlockFi had made financing of positions in GBTC a substantial part of its business, in trades designed to profit from the longstanding premium to NAV and restrictions in trading shares in the trust until six months or more after purchase. A client – or BlockFi itself – could buy spot bitcoin and aim to sell a GBTC holding to capture the premium once the shares are liquid.
The reversal of this trading proposition in late February led to speculation that BlockFi could have suffered substantial losses and also increased scrutiny of its risk management processes. BlockFi downplayed this threat, naturally enough, in podcasts by co-founder Zac Prince.
And the fundraising from investors including Bain Capital, Susquehanna and Hudson River Trading indicates that BlockFi does not face an immediate threat to its solvency.
But the episode highlights both the opportunities and potential pitfalls for savvy traders from a traditional financial background in exploiting bitcoin’s move into the mainstream.
Many of the ‘whales’ – or the 2.4% of account holders who control 95% of the value of bitcoin, according to Bank of America – remain anonymous, so it is difficult to know if they could be forced out of loss-making positions with traditional trading tactics.
There is also a strong animus against short-selling among evangelists for cryptocurrencies, which might make any potential whale hunter pause to consider the fate of Melvin Capital. It was forced by swarms of retail traders to close short positions in GameStop at a huge loss.
A better bet than a short position might be a wager on increased trading efficiency in the cryptocurrency market, which currently has extraordinarily high fees.
There is also a strong animus against short-selling among evangelists for cryptocurrencies, which might make any potential whale hunter pause
B2C2, a London-based cryptocurrency liquidity provider that was sold to Japanese financial services group SBI at the end of last year, is betting that increased volumes will accompany a reduction in fees and bid/offer spreads. This could see cryptocurrency trading evolve in a way similar to the traditional foreign exchange markets.
“We are coming with automation, which will compress spreads and let us get to the level let’s say of emerging market FX,” says B2C2 co-founder Max Boonen, who started his career trading derivatives at Goldman Sachs.
Bitcoin exchanges such as Coinbase have been able to maintain or even increase fees during the most recent surge in value, but downward pressure on fees and spreads is almost inevitable, especially if US regulators start to approve ETFs and spur price competition from major funds and banks.
But as competitive dynamics start to work their way through the crypto markets, there could still be periodic opportunities for bitcoin whale hunters to profit from weaknesses they identify in certain participants.
