2023-11-17 14:17:10 ET
Summary
- Bitcoin's price has doubled in 2023 and the Grayscale Bitcoin Trust has outperformed both BTC and BITO.
- The upcoming halving event and hodler wallets indicate a bullish fundamental setup for BTC.
- Bitcoin is currently overbought and a pullback to $31-33k could happen, but long-term prospects for GBTC shares remain positive.
Bitcoin (BTC-USD) has been on a rocket in 2023. Year to date, the price of BTC has essentially doubled. And the performance since mid-September has been particularly impressive as well with BTC moving from $25k per coin up to just under $38k per coin on November 15th. Year to date, the Grayscale Bitcoin Trust (GBTC) has outperformed BTC and the ProShares Bitcoin Strategy ETF (BITO) by a significant margin:
GBTC shareholders have been riding speculation that a spot bitcoin ETF will soon be approved by the United States Securities and Exchange Commission. Since the Grayscale Bitcoin Trust has traded at such a large discount to NAV over the last couple of years, the possibility of a spot ETF coupled with a successful court battle has fueled optimism in Grayscale's ETF conversion hopes. The notion that approval of a spot bitcoin ETF would be bullish for Grayscale is an idea that I've explored for Seeking Alpha in the past.
Since my last GBTC article in August, we've seen the discount to net asset value close from 25% to just 10%. With the arbitrage opportunity quickly closing in GBTC, I think it's a good time to reassess this idea. In this article, we'll take an updated look at BTC fundamentals and by extension the setup for GBTC shareholders. Beyond that, I'm going to do something that I don't always do in my Seeking Alpha articles; we'll look at technicals as well.
Bitcoin's Fundamental Setup
At this point in time, I think the most important fundamental data point is how far away we are from the next halving. With roughly 150 days remaining, we are getting very close to what has traditionally been a significant catalyst in the price appreciation of BTC.
Of course, the old adage is past performance is not an indicator of future returns. But this indicator has been pretty good so far. Every four years the block reward from mining is cut in half. This means that provided demand remains the same, the price of the currency will rise. That rise in price fuels more demand and BTC enters a bubble.
We can see on-chain that "hodler" wallets, or BTC in wallet addresses that haven't moved in at least a year, are gaining a share of supply. At 69.8% of the total BTC supply, the "hodlers" have control of their largest share of BTC that we've seen to this point so far. To put it another way, long-term holders are likely not selling at these levels with a halving just a few months away. And the reason is due to the supply/demand dynamic described above. Historically, the price of BTC has been many multiples higher a year after a halving event:
Halving | Price At Halving | Price 100 Days Later | Price 1 Year Later |
---|---|---|---|
2012 | $12 | $42 | $964 |
2016 | $663 | $609 | $2,550 |
2020 | $8,740 | $11,950 | $56,753 |
Source: StormGain, TradingView Coinbase price
Something else to consider is the fact that Bitcoin hasn't yet experienced a halving cycle with a Fed Funds rate of 5%. However, the equity market seems to believe we're at the end of that hiking cycle. If that is indeed the case, the current expectation for March rate cuts may have the same positive impact on BTC that it has had for equities in November.
To summarize; Bitcoin holders aren't selling, new issuance will become twice as scarce in April, and the market is expecting a rate cut in March. I believe the fundamental setup for BTC favors bulls. The technical setup is a bit more debatable.
Bitcoin's Technical Setup
Bitcoin is overbought. There I said it. Up until this recent pullback, BTC has been hugely overbought on the daily chart for about two weeks.
However, during significant uptrends, bitcoin tends to stay overbought for long periods of time. What can be observed on the daily chart to help us pick spots for profit-taking in our derivatives or swing trades is when we see higher highs in price coming with lower highs in RSI-14. We saw this at the beginning of the year, during the summer, and we're starting to see it again now.
What we've often seen when BTC gets this overbought is a return to a previous level of support/resistance and an oversold reading on the RSI. We obviously don't have that currently, but we'll likely get it in the coming weeks or months. At that point, it'll be safer to go long provided the broader trend is favoring bulls as it is currently:
Look, I'm not a TA wizard. I try to keep this stuff very simple and I look for important pivot points. I generally DCA my major long-term positions, of which BTC is one. But for swing trade capital, it's prudent to be mindful of technical signals and I think we're going to see a pullback down to somewhere between $31-33k in BTC. Will BTC hit $40k first before that pullback comes? That's certainly possible, but most of us don't sell tops or buy bottoms.
Risks
The main risk with holding any cryptocurrency or cryptocurrency derivative is the perceived volatility against fiat currencies. These assets can whipsaw 30-40% in a very short amount of time. There is added risk with longing cryptocurrency trusts because they introduce counterparty risk to assets that are designed specifically not to require custodian counterparties.
I should also mention that there is a level of uncertainty regarding Grayscale's parent company Digital Currency Group. Given that, it may be prudent to make sure you don't get overexposed to Grayscale as an asset manager. Related parties often own large percentages of the Grayscale shares outstanding and any forced liquidations from those related parties could depress NAV discounts if the market for the fund shares weakens. In the Q3 10-Q for GBTC, we saw related parties increase GBTC share count by just a few hundred shares from Q2. However, the total amount of shares held by related parties is slightly above 36 million, which is slightly over 5% of the shares outstanding.
Grayscale's funds also notoriously have high fees. Especially considering the company isn't actively managing the assets against price volatility or lending them out for yield. BTC held with Grayscale is simply sitting in cold storage through Coinbase (COIN).
Summary
Despite the risks associated with relying on a third party for bitcoin exposure, one of the primary reasons that I do hold GBTC is that the fund shares are a phenomenal trading vehicle for those who want to do that trading in a tax-advantaged account rather than through a centralized exchange or through a cross-chain DEX protocol like THORChain (RUNE-USD).
I've minimized my exposure to GBTC, in part because the NAV window has closed considerably, and also because I think BTC will go through some consolidation before it takes another leg higher. I suspect the gains for the year in GBTC have been had and it's wise to lock in some of this win. Again, I'm still personally long GBTC, but I think NAV traders will do better by rotating some GBTC profit into Grayscale's Digital Large Cap fund (GDLC) instead. All this said, if your time horizon is 12 to 18 months from now GBTC shares will likely be priced higher than they are today.
For further details see:
Grayscale Bitcoin Trust: Lightening But Still Long