Description

I’m prepared to receive serious flak for this recommendation and have thought about and levied many of the criticisms against myself. This is Value Investors Club, what could be more the antithesis of value than a speculative, non-cash flow producing instrument that Munger has called Rat Poison and Buffett has summarily dismissed countless times? What value can I or anyone add to the mix? Anyone following the situation is aware of the dynamics. Is this a cheap ploy to check the box on a VIC report without writing a proper report, doing the model, and fleshing out a thesis? Is this really my best current idea?

Thesis: Bitcoin ETFs represent a compelling short to medium term risk reward due to the both technicals of new Bitcoin ETFs post the sell the news sell-off, the halving in April, and fundamentals of relentless, excessive money printing in an election year. I am recommending a long position in IBIT.

To start, I have written a few digital asset write-ups on VIC, first a short on Playboy (PLBY) that can be found here: https://www.valueinvestorsclub.com/idea/PLBY_GROUP_INC/1369552061

Later I wrote up a long on the 6.125% bonds of Microstrategy (MSTR), led by missionary founder and Bitcoin Maxi Michael Saylor: https://www.valueinvestorsclub.com/idea/MICROSTRATEGY_INC/3671676854

My interest in digital assets comes from seeking transformational situations where things are so different that there is little historical analogy and thus more market inefficiency because many players will sit out. The Bitcoin ETF is likely a great example of this which I will explain in more detail below. Intrinsically there is a lot about Bitcoin and digital assets that turns me off especially if I put on my rational, value investor hat. 

My short on PLBY was in response to a highly inflated valuation due the market ascribing irrational value from Playboy issuing NFTs at the height of the NFT bubble in 2021. My write-up and short was exploiting that irrationality. 

My long on MSTR Bonds was a bet on the core software business which had been thrown out by investors because Saylor had de facto turned the stock into a version of the first Bitcoin ETF. When crypto plummeted in late 2022 after the implosion of FTX, bond investors ascribed negative value to the Bitcoin on MSTR’s books and sold the bonds wholesale. I took pains to clarify that even if Bitcoin went to zero the bonds were money good and would mature and be made whole, and if bitcoin went up the bonds would recover much faster, which is what transpired.

Before fleshing out the thesis a bit more, what is Bitcoin really? I’d propose it's a collectible. How are collectibles valued? Supply and Demand, in other words whatever the market will bear. Said another way, greater fool theory. However, there is now a long history of collectibles, let's say as an asset class. I’d suggest that includes art, artifacts, rare books, stamps, sports cards, old toys, games, the original macintosh, and thousands of items that society has collectively decided have collectible value. I believe bitcoin is the same, and it has likely crossed the chasm of being a blue chip collectible. 

Collectibles are priced by the marginal buyer and seller, so technicals matter a lot. The advent of the Bitcoin ETF is a transformational event unlike any in the history of collectibles. In one moment, the wealth of almost the entire world gained the ability to purchase this collectible with the click of a button. I believe the ramification of this transformation is radically underappreciated by market participants and thus the positive skew far exceeds anything priced into bitcoin. This is because this has never happened and market participants are unable to properly value it. 

That is not to say that Bitcoin will surely go higher, investing, or if you will speculating in collectibles is probabilistic. However, the upside case in a market that remains tranquil is likely far greater than appreciated or priced in, creating a compelling risk reward to be long the ETF. 

To discuss supply, as of year end about 18.8mm bitcoins were produced (mined), with new BTC production currently at a rate of 900 per day, an annualized production rate of 328,500, or a 1.1% annual growth rate. In mid-April 2024 at the halving, the new production rate will drop to 450 BTC produced per day, dropping the supply growth to about 0.5% per annum. 

On the demand side, the wealth of the entire world can now seamlessly purchase BTC, after years of hearing about it. Previously, buying BTC came with many obstacles, including high fees, custody issues, hacking risks, complexity around bookkeeping for taxes, ect. With those barriers removed, pent up demand can now purchase BTC with ease. This is likely to create a consistent wave of demand for BTC all things being equal. 

Digital natives have shown their propensity to like BTC as an asset, in many cases over things like gold as a store of value. Much of the world’s wealth is in the process of being handed over to digital natives in what will be a many year’s trend. It is likely that digital natives will place some percent even if small into BTC, creating a consistent demand trend. 

Historically collectibles tend to do well during times of currency debasement. We are in such a time, with the government printing excessively and both parties showing no inclination to reduce spending, or raise taxes. The solution is continued money printing. Those worried about retaining their wealth will continue to shelter it in hard assets, real estate, and collectibles, with BTC being a prime candidate for continued inflows from this cohort. 

With supply growth poised to slow again in mid-April, and with data showing that some 70% of BTC is stored by holders who have not been active sellers for the past year, there isn’t ample supply to fulfill the current and new demand for BTC. Not to mention that a non-trivial percent of BTC lies in wallets that were lost, forgotten about, or passwords misplaced. While nascent, the recent demand trends from ETFs show demand that is 10x the new supply being created. 

Similarly, short term technical selling pressure from the Greyscale Bitcoin trust converting to an ETF obscured the strong demand trends from BTC ETFs. However, the rate of selling out of Greyscale is slowing and eventually will become immaterial. Thus another source of BTC supply will dry up as demand is likely to remain constant. 

All of these trends are supportive of a rising BTC price, which itself could become reflexive, possibly excessively so. 

What about Munger and Buffet? First, their mantra is circle of competency. This isn't theirs clearly, but that doesn’t make it a bad idea. They missed other transformations like Amazon and Google, and later recanted. Other smart investors like Howard Marks, Stanley Druckenmiller, and Paul Tudor Jones, have spoken favorably about BTC at times. This thesis isn’t so much a long term bet on or belief in BTC, as much as a view that at this moment in time, due to the recent transformation of access to BTC into a supply cut, there is a unique opportunity to own a BTC ETF with a compelling risk reward due to the favorable technicals described herein.

I am suggesting IBIT, the Blackrock ETF, because it is liquid and has a relatively low fee (12 bips until AUM reaches $5B, then 25 bips).     

Price Target - Looking to exceed the S&P by 1000-1500 bps

Disclaimer

This report represents my personal views only at the time of submission, my views can and will change and I may not communicate those changes in a timely way or ever. You should do your own work and not rely on this submission to make any investment decisions. This submission or past or future comments are not financial advice. 

Catalyst

Halving in Mid-April 

Greyscale selling slows or ceases

Continued demand from ETF buyers

Fed cuts rates

Continued money printing by US

Asset Managers like Vanguard and LPL provide clients access to BTC ETFs