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CRYPTOCURRENCIES  •  October 19, 2021  •  Jon Wolfenbarger

Bull Case For Bitcoin ETFs — And The Best One To Buy Now

FT. LAUDERDALE, FL — Today, the first official Bitcoin ETF began trading: ProShares Bitcoin Strategy ETF (ticker BITO).


In May, we wrote about Bitcoin in an Investing Insights article titled “Trader Alert: 5 Bitcoin Bear Market Sell Signals”, where we warned investors about five technical “sell signals” for Bitcoin. Bitcoin fell 42% over the next five weeks.


In August, we wrote another Investing Insights article titled “What Smart ETF Investors Need To Understand About Bitcoin, Gold and Stocks”. In that article, we showed how Bitcoin trades much more like stocks than gold, which is contrary to the typical investment case for Bitcoin. We also showed how Bitcoin tends to be a leading indicator for major moves in stocks.


In this article, we will present our current bull case for Bitcoin ETFs — and discuss what we believe is the best Bitcoin “ETF” to buy now.


Fundamental Bitcoin ETF Bull Case

Bitcoin is the leading digital cryptocurrency in the world today. The fundamental bull case for Bitcoin is that it is essentially “gold 2.0”, as it shares two key features in common with gold:

  1. it can be and is used as a medium of exchange
  2. it has a limited supply that cannot be changed by governments


If Bitcoin (or gold) were to be used as money instead of government fiat money that is created out of thin air by central and fractional reserve commercial banks, then the boom and bust business cycle could be eliminated, based on Austrian Business Cycle Theory. This would create a much more stable, prosperous and freer world.


The value of all the gold in the world is $11.5 trillion. The value of all the Bitcoins in the world is $1.2 trillion. So Bitcoin would have to increase in price by nearly ten-fold to equal the value of gold. Gold has been used as a medium of exchange for thousands of years. Bitcoin was first used in a commercial transaction in 2010 to buy two Papa John’s pizzas for 10,000 Bitcoins (now worth $642 million!).


As Bitcoin becomes more widely used and accepted as a medium of exchange and investible asset, the price of Bitcoin should rise over time. This is the core fundamental case for Bitcoin. The primary risk to Bitcoin is that governments make it illegal to use, as China has recently done.


Bitcoin can be owned in various ways, including using a “digital wallet”, a cryptocurrency exchange or a payment platform like Paypal.


The appeal of a Bitcoin ETF is that it can be bought and sold just like any other ETF with a brokerage account. That makes it a much more convenient way for most investors to get exposure to Bitcoin, both retail and institutional investors. Bitcoin ETFs should increase interest and demand for Bitcoins which, along with rapidly rising government fiat money supplies, should lead to higher prices over time.

  

Technical Bitcoin ETF Bull Case

But as with any financial asset, even with a fundamental case as strong as Bitcoin’s, the price of Bitcoin fluctuates significantly in bull and bear market trends. So to maximize profits and minimize risk when investing in Bitcoin, it is helpful to use technical (chart) analysis.


As shown in the chart below, Bitcoin ($BTCUSD) currently has the following positive technical characteristics:

  1. it recently had an upside breakout above the downward sloping trend line we drew connecting the April high and the September high
  2. it is approaching the all-time high of $64,859 on April 14; a breakout to new all-time highs should be an even more bullish signal
  3. it is in a bullish uptrend on all major time frames, with the 20-day moving average (20-dma) above the 60-dma (short-term uptrend) and the 60-dma above the 250-dma (long-term uptrend)
  4. the second clip with the Bitcoin price relative to the S&P 500 (red line) shows it continues to outperform the S&P 500 and recently had a relative upside breakout
  5. the third clip of the PPO shows it has positive near-term price momentum
  6. the fourth clip of the RSI shows it is “overbought” and could be due for a pullback, but it could also be a bullish sign showing how strong the current uptrend is



[Bitcoin




Given the current overbought situation and lots of excitement surrounding the new Bitcoin ETFs, there is the natural concern that sentiment is overly bullish on Bitcoin. However, the Google Trends chart below of the word “bitcoin” shows that there is not nearly as much interest for Bitcoin as there was at the prior peaks in late 2017 and early 2021. That suggests sentiment is surprisingly subdued for Bitcoin now, which is contrarian bullish for Bitcoin prices.




Bitcoin Google Trends





Now that we have discussed the bullish fundamental and technical cases for Bitcoin ETFs, let’s look at which Bitcoin ETF is best to buy now.


Cash and Carry Trade

Since the ProShares Bitcoin ETF and the other eight (or more) proposed Bitcoin ETFs are required to buy Bitcoin futures contracts rather than actual (virtual) Bitcoins, they will increase demand for Bitcoin futures contracts relative to actual Bitcoins. That should lead to “contango”, where the Bitcoin futures prices are higher than Bitcoin spot prices.


That creates a risk-free arbitrage profit opportunity where one can simultaneously sell the higher priced Bitcoin futures and buy spot Bitcoin and pocket the difference as a profit, since futures prices converge to spot prices at expiration of the futures contract. Bitcoin futures are trading at about a 15% premium to spot Bitcoin, double the premium of the first nine months of this year.


Given the current investment environment of low interest rates and record-high stock valuations, a double-digit risk free return is incredibly attractive!


Regardless of whether one wants to make that arbitrage trade, this issue generally makes buying spot Bitcoin more attractive than buying a Bitcoin futures ETF, all else equal (which it is not, since it is easier for most investors to buy Bitcoin exposure via an ETF).


GBTC Bull Case

But there is another “ETF” alternative that invests in actual Bitcoins rather than Bitcoin futures: Grayscale Bitcoin Trust (GBTC).


GBTC was launched in 2013 and became the first crypto SEC reporting investment vehicle in 2020. GBTC is the largest Bitcoin investment vehicle in the world, holding approximately 3.5% of all Bitcoins in circulation. 


Prior to today, GBTC was the only way Americans could buy or sell Bitcoin like a stock or ETF. It is not legally an ETF, but it acts like an ETF and tracks the price of Bitcoin closely.


GBTC has the fundamental and technical positives of Bitcoin, but not only does it not suffer from the “cash and carry trade” problem of futures-based ETFs, but it is trading at a 16.5% discount to net asset value (NAV). It used to trade at a premium prior to late February 2021.



GBTC discount



Conversion to Spot ETF?

This week, GBTC filed with the SEC to convert GBTC to a spot Bitcoin ETF, arguing that since the SEC is now comfortable with a futures-based Bitcoin ETF, it should also be comfortable with a spot-based Bitcoin ETF.


This would make GBTC similar to the popular SPDR Gold Shares gold ETF (GLD), which is an ETF that owns gold bullion. GLD generally trades very close to its NAV.


If the SEC allows GBTC to convert to an ETF, the current 16.5% discount would disappear and GBTC holders would enjoy a 16.5% return on top of whatever return (positive or negative) Bitcoin provides, which would more than compensate GBTC investors for the current high annual expense ratio of 2.00%, which is more than double the BITO expense ratio of 0.95%.


Thus, buying GBTC now provides one with the upside opportunity of Bitcoin, plus the potential for an incremental 16.5% return as the discount closes over time, particularly if the SEC allows GBTC to convert to an ETF. There is now a 75 day review period where the SEC will decide whether or not to allow GBTC to convert to an ETF.





For much more on the economics of money and Austrian Business Cycle Theory, please see our FREE Special Report entitled "UNDERSTANDING ECONOMICS TO INVEST FOR BULL & BEAR PROFITS".



IN THE NEWS: Media and Press coverage has exploded in the last couple of months on Jon Wolfenbarger and BullAndBearProfits.com forecasts and views of major moves in the markets. We’ve summarized some of the stories on our Media Appearances page. Check out those interviews, radio appearances, etc! 






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BEAR MARKET RISK  •  August 28, 2021  •  Jon Wolfenbarger
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ETF TRENDS  •  August 26, 2021  •  Jon Wolfenbarger
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