Exiting Bitcoin Investment Trust due to Premium

This trade exit on GBTC describes how exiting Bitcoin Investment Trust due to premium was decided. The original GBTC position was purchased in March 2017. To recap the GBTC is an investment trust whose price is tied to bitcoin. The historically high premium to the actual underlying bitcoin price is the main reasoning for selling our GBTC position and replacing it with bitcoin and etheruem products that can replicate similar exposure (without that premium). This trade was IRA eligible so there was no issue of paying extra capital gains by selling after 11 months (instead of waiting for 12 months for long term capital gains to kick in).

Exiting Bitcoin Investment Trust due to Premium

The charts below compares an European based Bitcoin fund SE:BITCOIN.XBT (as a proxy for Bitcoin spot price) with GBTC. This clearly shows that throughout 2017 people have been prepared to pay a huge premium to own bitcoin in their US based brokerage account.

GBTC Feb 2018 1 year trailing premium
Bitcoin Investment Trust GBTC Trade Exit - Feb 2018 1 year trailing premium - 20180215

GBTC Feb 2018 3 month trailing premium
Bitcoin Investment Trust GBTC Trade Exit - Feb 2018 3 month trailing premium - 20180215

Combined with bullish Bitcoin 2017 price action and inflated premium, the GBTC price has moved up strongly. The above charts and Bloomberg show how the GBTC premium has moved for the last 12 months in a trading range of 50% to 120%. In only the last 3 months the GBTC premium has been as high as 120% in Dec 2017 and low as 30% in early Feb 2018. The premium trades aggressively higher on rallies and lower on sell offs. This behaviour has the effect of amplifying trading extremes, but increasingly makes it a less reliable buy and hold product.

As a recap, when the trade was entered in March 2017 GBTC premium had shrunk down to about 8% because there was the belief that a new Winklevoss Twins bitcoin ETF was about to be allowed by SEC. Once that was announcement was negative, the GBTC premium returned with a vengeance.

According to Bloomberg the average trailing 12 month GBTC premium was 53% (on 16th Feb 2017). By comparison the Bitcoin tracker fund premium was 0.08%. Additionally there is a 2.0% management fee associated with GBTC which is used to help manage the cold storage and security of the underlying bitcoin asset – so any premium paid on the actual GBTC spot price would seem to be excessive. The Bitcoin tracker fund management fee is 2.5% (higher) but since it trades at only 0.08% premium to NAV it is a relative “bargain”.

On 16th Feb 2017 GBTC had a 1 year performance return of 1,574.75% that more than double the Bitcoin tracker fund 1 year return of 774.33%. This is amazing given that the stated aim of the products is identical – the GBTC out performance results are exclusively due to premium.

For reference here are the Bitcoin and Ethereum products available that trade in Europe but can be traded in a US based brokerage account. These products do not have a huge premium to spot bitcoin and are IRA eligible. Bizarrely the swedish Krona product has the higher volume, over the Euro based product. All of these fund products introduce some currency risk exposure, but that is likely less to be way less variable than the GBTC premium risk.

Coin
Currency
Info
Bitcoin Swedish KronaCOINXBT:SS
Bitcoin EuroCOINXBE:SS
Ethereum Swedish KronaCOINXBE:SS
EthereumEuroCOINETHE:SS

A Good Trade but Poorly Traded

This GBTC trade was ultimately a great investment, but one that was traded frustratingly poorly.

A small tranche was sold in May 2017 to cover the risk on the original position and the rest was left to run as “house money”. Clearly with hindsight that was the “wrong” thing to do, but is it good risk management on a very volatile product – and allows staying in the trade for a much longer amount of time. This risk management part was not poor trading, but the management of the resulting price action in 2017 can be improved – as discussed below.

The final run up into Dec 2017 was not well traded, and therefore missed the significant peak at $39, and survived the drop to $10 in Feb 2017, so decided to exit with some value still intact at $18. This is a very hard trade to take psychologically because of the anchoring to the high point at $39. However the 1300% returns in less than a year is still amazing, yet disappointing from a trading perspective. The split adjusted entry point was $1.44 so clearly this was all “house money” but some exit trading at higher prices should have been achieved into the Dec 2017 peak. This is not purely hindsight – it was clear the short term nature of the blow off top, even during Dec 2017. This does not mean the end of the bitcoin “bubble” – just a medium term trading top that should have been taken advantage of.

Bitcoin Investment Trust premium – Trade Exit

GBTC premium expands on rallies (up to 120% in Dec 2017) and contracts on huge sell offs (down to 30% in early Feb 2017). On trade exit at about $18 that is approximately an average 80% premium, which is somewhere in the middle of the range extremes for the last year. On trade exit with bitcoin at approximately $10k, the book value (or NAV) of GBTC was about $10, therefore there is approximately $8 of premium to nav (or about 80%). Therefore about 1800 shares of GBTC buys approximately one bitcoin, but the book value is about 1000 shares. Clearly there is a convenience premium, but 80% over book value is very high. That does not mean GBTC price cannot rise further, or the premium increase more in 2018. However if the premium ever shrinks to say 30% then it is quite possible to lose money in GBTC even if the bitcoin price goes up. When you buy GBTC at $18 about 45% of your purchase is premium (or “fluff”) over the price of the underlying bitcoin. That is a very hefty premium to spot.

Trade Entry was at GBTC split adjusted $1.44 (actual pre split price at that time was $131) in March 2017 when bitcoin was approximately $1250. Trade exit was $17.96 when bitcoin was about $10025 in Feb 2018.

Trade Replacement

The GBTC investment can be replicated without premium using the Bitcoin tracker funds. Since 1000 shares of GBTC represents approximately 1 Bitcoin, these trading approaches could be taken:

1. Sell 1000 shares of GBTC ($18,000 USD) and purchase $10k Bitcoin tracker fund – this maintains exactly 1 Bitcoin exposure. The remaining $8000 premium can be maintained as cash for future purchases if there is a pull back or for other investments. This maintains bitcoin only exposure.

2. Sell 1000 GBTC then purchase $10k Bitcoin tracker fund and $8k Etheruem tracker fund. This gives exactly 1 Bitcoin exposure but allows using the GBTC premium to buy a new Etheruem position. This has created a slightly more diversified crypto portfolio – but still fully invested in crypto, with no cash on hand.

3. Sell 1000 GBTC then purchase $6k Bitcoin tracker, $6 Etheruem, and keep $6k cash. This gives a less aggressive portfolio because it keeps some cash on hand in case of a pull back.

4. Sell GBTC and maintain cash to wait for a big pullback to invest. If you are a believer in the long term crypto currency bull, this is arguably the biggest opportunity risk – crypto prices are hard to predict and can be notoriously bubbly – so it having exited once at lower prices it is hard to reestablish at significantly higher prices.

These reallocation strategies are all tax optimal in an IRA.

Summary

There is a significant chance that if there is a bullish BTC price march in 2018 towards $20k again then GBTC will do very well. Indeed one day later BTC is already trading 10% higher at $11,000 (so clearly this is proving a badly timed exit). However there need to be discipline to recognize when that the GBTC trade now has premium risk outside of just Bitcoin spot price risk. That risk can be resolved by selling GBTC and buying bitcoin tracker funds.

This is not necessarily a price extreme for bitcoin, but a potentially a premium extreme in GBTC. Still bullish on bitcoin and crypto assets for the next few years, however GBTC may not prove to be a good long term buy and hold product (due to the premium).

In summary this is not purely a bitcoin play, but has become a play on the premium investors are prepared to assign for the convenience of exchange traded bitcoin product. Importantly selling GBTC is a not a bearish call on bitcoin or crypto in general, just trying to avoid being the last one out when playing musical chairs with the premium trade.

Bitcoin Investment Trust Premium

This is a bitcoin investment trust premium idea from seekingalpha.com we have taken a position in last Friday.

Investment Setup

GBTC is an investment trust whose price is tied to bitcoin, with an extreme caveat that historically it has traded as sometimes astronomical premiums to the actual bitcoin price. The chart below clearly shows people have been prepared to pay a huge premium to own bitcoin in their brokerage account.

Bitcoin Investment Trust GBTC Price Arbitrage Idea - 20170310

The chart is not easily available online. It had to be created manually by downloading the time series for GBTC prices and bitcoin prices, then working out the “premium other NAV” between them. When this was done both the GBTC & bitcoin prices were indexed back to 100, and the “premium over NAV” was plotted on the same Excel chart. Note that each individual GBTC share represents 0.09336483 of a Bitcoin (BTC) – so that ratio need to be accounted for when calculating the premium.

These are some highlights from the chart:
- GBTC premium to bitcoin price has been as high as 100% down to 5% in last 12 months
- GBTC was trading at a significant premium (70% to 100% range) to actual bitcoin price in June/July 2016
- GBTC is now only trading as about a 5% to 10% to bitcoin price in March 2017
- This premium has trended lower in last 2 months in anticipation of new Winklevoss bitcoin ETF (COIN) getting SEC approval.

Short Term Investment Thesis

- If bitcoin ETF (COIN) is approved, then this premium should be reduced further – but GBTC price will rise due to bitcoin price
- If bitcoin ETF (COIN) is not approved, then premium should revert to 30% range & GBTC price should increase to reflect that
- Absent a huge bitcoin crash this should be a winning scenario in either case

Medium Term Investment Thesis

- Bitcoin is stable above $1000 for 2017
- Historical 30% premium to bitcoin price is restored, because there is no longer a viable pending Bitcoin ETF that would compete with GBTC.
- GBTC has applied to be listed on the NYSEARCA which is pending a decision by Oct 2017. It currently trades on OCTBB and if it moves off the bulletin board this should improve product liquidity and investor access. GBTC premium might trend up in anticipation of this a few months out from the announcement (something to watch).

Bitcoin Investment Trust premium – Trade Entry

Trade Entry was at GBTC $131 on Friday when bitcoin was approximately $1250. Trade exit would be when a the premium is restored to typical range greater than 30% – but we have to wait 30 days to exit due to 30 day rule.

Is lending crypto currency safe?

Excitingly it is now possible to lend out your Monero and other crypto currencies to other investors. Crypto currency lending is a bit like peer to peer lending for crypto, but the lending purpose is exclusively for other customers margin requirements (so not diversified). Lending crypto currency needs to be done via a crypto currency exchange where your currency is loaned to other exchange customers so that they can establish short or margin long crypto currency trading positions. This article chiefly considers lending out Monero (XMR), but the principal applies to any other crypto currency that allows exchange lending.

lending crypto currency

As an investor annual rates of return on any individual loan have ranged from 3% to over 100%. The rates on exchanges are typically quoted in daily returns, so a daily rate of 0.009% is approximately 3% – you can easily use any online calculators to convert any daily rate to an annual rate. An example annual to daily interest rate calculator is here (no affiliation).

We use Poloneix for lending, and find it gives good liquidity and relatively simple trading interface and order book. There are other platforms like Bitfinex but haven’t used them for lending.

As of October 2016 to our knowledge, no one has ever lost significant money lending Monero (or any crypto currency) on poloniex or other exchanges (so far). However before you go “all in” there are some significant risks to be aware of. The attractive returns are not just a free lunch. Here are some basic risks…

Margin risk

The main issue with exchange lending is it assumes that the exchanges algorithm for exiting customers out of their margined positions will not result in major loss. Essentially when lending on the exchange, your xmr is loaned to other exchange customers so that they can establish short or margin long positions. As usual for margin trading the exchange requires some capital level to be maintained in a customers exchange account, for the duration of their short or margin trade. If the crypto currency market moves against the customers positions and they no longer have the margin capital required to maintain their position, then the position will be exited by the exchange. This will likely be at a sizable customer loss. The theory is that the exchange has modeled the maximum likely amount capital required across ALL customers to meet an extreme move.

In theory the crazy moves should occur rarely and the exchange should be able to control any loses by forcing customers to liquidate their positions in real time. Basically they can take out multiple customers over their margin limit, but in theory not all customers at the same time should be affected (in theory!). However in practice these huge moves tend to happen more frequently than the statistics would predict. A good recent real life example is when the Swiss franc move meant several foreign exchange (FX) trading firms had to eat a few million of customer losses. This was in the FX currency market, but the principal could easily apply to crypto currency lending. Therefore you are depending on your exchange to have well executed customer margin requirements and forced trading position liquidation strategy.

Platform risk

Exchange lending and indeed storing any crypto currency on any exchange is subject to platform risk. That is the risk that the actual exchange platform fails and you lose some or all of your crypto currency balance. This could occur through hacking of poor exchange security or even an issue with the particular crypto protocol that can be exploited. Basically there is a slight possibility that your coin on an exchange just disappears overnight. You can obviously reduce hacking risk on your individual account by using website security features like two factor authentication. However that doesn’t guard against back door hacking exploits at the exchange level. You should probably keep no more than 20% of your entire stash with one website, and even possibly budget for 20% of it disappearing every 3 years! For example, storage solutions for monero are to maintain a cold storage (off exchange wallet) under your control. That requires significant technical know how to setup, but is likely worth it to maintain your stash securely.

If you don’t think that exchange default can happen look at the historical hacks on mtgox Bitcoin (March 2014) and bitfinex (August 2016).

Important takeaways highlight these two possibilities storing your coin on exchanges:
- total loss: many mtgox investors lost all their bitcoins
- partial loss: Bitfinex distributed the losses against all customer balances irrespective of cash or coin.

The Bitfinex partial loss example has an interesting piece of moral hazard. Note that even though only Bitcoins got hacked, ALL the OTHER coin balances on your reduced by 36% and were replaced with an exchange IOU! Essentially you were exposed to Bitcoin security flaws even if you had zero Bitcoin balance – which seems somewhat logically unfair. The point is that you could be exposed to balance loss for any coin on an exchange – even you did not think you were.

Is lending crypto currency safe?

The non bitcoin crypto lending market is typically less than 2 years old for most coins. Lending crypto currency on any exchange may mean that there may technology glitches (eg unable to liquidate as required) or lack of volume (eg not able to lend out all the currency you wish to, because there are not enough people to lend to). However we have tried this though and have been able to lend out several thousand XMR for about a week relatively easily. The % return is potentially good for the risk, typically earning about 5% to 15% annualised on average – even if you have some loans in the 15% to 100% range – typically it is hard to get an entire portfolio allocated at those interest rates.

This also all assumes a relatively low default rate which may not be true for people trading crypto currency on margin in the long term (only have a few months of real data to work from). It maybe long term profitable as well, but given that that there are no statistics yet on this market, it is hard to make accurate projections. However if using US equity lending as an example, most brokerages seem happy to lend to you at about 6%, so assuming the underwriting model for margin accounts is similar, then this could offer decent long term returns.

This approach is also somewhat similar to peer to peer lending (eg prosper and lendingclub), so could offer similar returns, but is probably a level up on the risk spectrum (above say junk bonds). Bear in mind that any defaults that occur could be long term expensive, because you lose out on the long term price appreciation potential of your currency of choice – it would be disappointing if you lost half your coin stash on lending, only to see your chosen coin price rise into the clouds in the following months.

In summary, it is worth a look as an idea, but there is significant “very bad event” risk for any crypto currency exchange platform that is hard to quantify. It would almost definitely not be prudent lending out your entire monero stash, in case in does not perform as expected. However investing about 5% to 25% of your monero stash in margin lending can give you “pseudo dividend” on an investment which otherwise doesn’t yield anything – but you might wish to spread your lending over multiple exchanges.

Monero XMR – Trading Update – 26-Aug-2016

Monero XMR – Trading Update needs to be given this week, specifically because the market has recently moved massively upwards since the latest trading update in March 2016.

Please note that due to market volatility it is quite hard to capture consistent pricing for screenshots – so any prices given or calculations done using those price are only indicative (but they should still be approximately correct).

Monero XMR – Trading Update – Overview

As of Aug 22nd 2016 there are currently available approximately 12.8 million Monero XMR. With a current Monero XMR price of $4.20 USD, that gives a marketcap of approximately $53.6 million (in USD). This size compares it with a small penny stock, so it still has significantly size to grow if it is even slightly adopted for any mainstream uses. The following screenshot from coinmarketcap.com gives a quick overview:
XMR Aug 2016 Market Capitalisation - 20160826

Since most people probably have not heard of it this is a quick overview – Monero is an alternative currency (sometimes referred to as “coins”) with the most well-known being Bitcoin. In the last 2 years there have been many such coins created for a diversity of purposes. These new “coins” are the brave new world for cryptographic currency (“cryptocurrency”, or even “crypto”), but are still in the early adoption phase. One of the main selling points of Monero is that it can mathematically provable as truly anonymous, unlike Bitcoin with can be traced via the Block Chain. It is one of the foremost alternative crypto currencies that has actually survived long enough to potentially become a replacement for the well known Bitcoin (BTC). For some more background you can review our original investment from last year.

Monero XMR price since inception

The following chart shows the price swings for Monero since inception, priced in Bitcoin BTC. This highlights the mini price bubbles on inception, in Mar 2015, Mar 2016 and most recently in Aug 2016. You can track the real time Monero XMR to Bitcoin BTC price here.
Monero XMR Trading Update Monero Historical Price Chart Since Inception 20160826

Monero XMR Trading Update – Year to date 2016

This price move appears to be a significant move on large volume, therefore worthy of a trading update. Monero XMR is going up because of fundamentally wider adaption in other market places, which means that it will get used as currency of choice by more people who want crypto currency. Specifically this move has been driven by news that leading dark net market will start supporting Monero. The assumption is it will win the war to be adopted as the primary crypto currency, potentially ultimately replacing bitcoin (but that is several years out). Don’t know if move is sustainable in short term, but it’s based somewhat on fundamentals, not just a speculative pump (with no reason) which sometimes happens with these coins.

The following chart zooms in to show the significant volume move year to date up to August 2016. From a low of 0.00105 BTC to a high of 0.00938 BTC, with a current trading price of about 0.00735 BTC on 22nd August 2016. In the last week Monero has traded approximately 65,000 BTC on poloniex. Assumming the average Bitcoin price of $576, that is approximately $37.4 million USD.
Monero Historical Price Chart YTD 2016 20160826

Valuing Monero in US dollars

Importantly all the Monero charts shown above are valued in Bitcoin BTC. The Monero Bitcoin XMR BTC exchange rate is more reliant on the value of bitcoin itself. So if you liquidate any Monero using the XMR BTC price you then obviously end up holding Bitcoin, which can obviously have it’s own price volatility (and is a competitor for Monero). For example if positive Bitcoin related news caused the Bitcoin price to rise faster, the XMR BTC will go down even though nothing may have fundamentally changed with Monero.

Therefore looking at the Monero XMR exchange to USD dollar can be a better independent value indicator because it doesn’t depend on value of bitcoin.

There is a USDT coin that literally stands for “US Dollar Tether” which is a coin representation of USD cash. As the following chart shows Monero XMR to USDT (USD dollar) price is at all time highs in USD, similar to Monero XMR Bitcoin BTC price. However Monero has always mostly trended upwards in USDT (US dollars), without the Bitcoin related swings.

Monero USDT Historical Price Chart YTD 2016 20160826

Liquidating Monero XMR into USDT means you are attempting to replicate “cash”, but importantly without having to convert back to physical US dollars. That is if you hold USDT it attempts to represent the equivalent in USD cash in your local bank account, but actually as a coin so you can trade to buy other coin. This is useful because there are increasing regulations about adding usd to coin related investment, and if you are already in the coin eco system this is a good way to “go to cash” with out actually exiting into real US dollars.

Haven’t done enough research to understand USDT long term stability – and its definitely NOT FDIC insured like a bank account! However presumably it is safe enough for a few weeks while you plot your next investment move (or move it to physical USD). However be careful with USDT liquidity if moving from XMR on poloniex, the order book (scroll down search for “Sell orders” section) may only support a few hundred XMR at a time so don’t try and liquidate a huge position without small test orders first.

eBook including our disclosure

In the spirit of full disclosure, our current position is approximately 0.1% of all outstanding Monero so we are definitely “long”. However that has been held from more than a year. The aim is for a buy and hold investment though and we very rarely trade the core position (for example, have made no sales for more than a year). We could exit or scale back significantly if something materially affected the Monero marketplace, however we are more likely to add on weakness not sell. The cost basis of the investment is relatively low, so we are not actively trading day to day. Typically the price drifts along, but then takes off faster than you can react, as per this recent month’s rally – so our investment option is that the ability to time trades around the position is not as important to actually have a position. We have no plans to sell any Monero yet, but if the price went exponentially higher we would sell to cover our original cost basis. However if you are a true believer in cryptocurrency for a long term medium of exchange you’d never sell any this cheap anyway.

If you are interested in learning more we have written an eBook Better than Bitcoin – A Beginners Guide to investing in Monero.

Monero XMR – Trading Update – 02-Mar-2016

This is a Monero XMR trading update because the market has recently moved significantly in Feb 2016. Since most people probably have not heard of it this is a quick overview – Monero is an alternative currency (sometimes referred to as “coins”) with the most well-known being Bitcoin. In the last 2 years there have been many such coins created for a diversity of purposes. These new “coins” are the brave new world for cryptographic currency (“cryptocurrency”, or even “crypto”), but are still in the early adoption phase. One of the main selling points of Monero is that it can mathematically provable as truly anonymous, unlike Bitcoin with can be traced via the Block Chain. It is one of the foremost alternative crypto currencies that has actually survived long enough to potentially become a replacement for the well known Bitcoin (BTC). For some more background you can review our original investment from last year.

Latest Monero XMR price move in context

The following chart shows the price swings for Monero since inception, highlighting the recent move up in Feb 2016. You can track the real time price here.
Monero XMR Historical Price Chart Since Inception 20160302

Feb 2016 Monero XMR price move

The following chart zooms in to show the significant volume move in Feb 2016 only. From a low of 0.0012 BTC to a high of 0.00246 BTC, with a current trading price of about 0.00194 BTC on 2nd March 2016.
Monero XMR Historical Price Chart Feb 2016 20160302

Please note the Monero XMR market is relatively illiquid and can be easily manipulated by people who already have sigificant XMR stash and wish to “paint the tape” showing large up or down price swings. However this price move appears to be a significant move on large volume, therefore worthy of a trading update.

If you are interested in learning more we have written an eBook Better than Bitcoin – A Beginners Guide to investing in Monero.

Investing in Monero Crypto Currency

Alternative currencies known as “coins” have received a lot of attention in the last few years, with the most well-known being Bitcoin. In the last 2 years there have been many such coins created for a diversity of purposes. Usability as a medium of exchange is one of the distinctive characteristics they have in common. These new coins are the brave new world for cryptographic currency (“cryptocurrency”, or even “crypto”), but are still in the early adoption phase.

Adoption is both a critical measure and a crucial means of success for a medium of exchange. Confidence in the liquidity and fungibility of a currency is a crucial factor enabling adoption. The US dollar, for example, has wide spread adoption. Many worldwide markets transact with it. Consequently, governments and banks around the world keep US dollar reserves. Since World War II it has taken the place of the dominant global reserve currency. The US dollar has popular confidence, because the US government promises never to default on their debts. This promise is respected in part because it is easy to keep, as the US government can always issue more currency to pay those debts, since the dollar has not been backed by gold (a commodity with stable and finite supply) since 1971. The US Dollar is also seen as a store of value, and typically maintains relative price stability compared to other currencies.

The example of the US Dollar illustrates what people what to see in a stable currency. This guide looks into one particular new crypto currency from this list of coins, and gives the investment case for investing in Monero (coin ticker symbol: XMR). We will consider how it may gain adoption, widespread confidence and become a store of value, potentially ultimately overtaking Bitcoin.

Please note the terms “Monero” (the coin name) and “XMR” (the coin ticker) are used interchangeably to refer to the coin.

A Brief History of Monero
Monero is one of the foremost alternative crypto currencies that has actually survived long enough to potentially become a replacement for the well known Bitcoin (BTC). Monero has been in continuous operation since 16 April 2014. Initial miners began to offer it for sale on the bitcointalk.org forum directly thereafter. As many as 10000 XMR traded for 1 BTC in those earliest days. Because of the differences between Bitcoin and Monero protocols and programming interfaces, exchange platforms designed for Bitcoin clones would not work for Monero without extensive modification. When poloniex.com offered a market denominated (as is typical) in Bitcoin, it became easy for Bitcoin holders to buy Monero, and that created an initial price bubble.

The following chart shows the price swings for Monero in its first 15 months of trading, from a high of approximately 0.011 BTC to a low of approximately 0.0009 BTC, rebounding to the current price in Aug 2015 of approximately 0.0023 BTC:
Monero Historical Price Chart Since Inception 20150810

One of the main selling points of Monero is that it can mathematically provable truly anonymous, unlike Bitcoin with can be traced via the Block Chain.

If you are interested in learning more we have written an Amazon Kindle eBook Better than Bitcoin – A Beginners Guide to investing in Monero.