Market Recap & Box Score

Monthly Recap: December 7, 2017

A Primer on Bitcoin

As Bitcoin’s price has soared almost 2,000% since December 2016, the volume of enquiries from clients has closely mapped the meteoric rise.  Regular readers may remember our comments in our July 2017 newsletter which explained the basics behind cryptocurrencies.  Fast-forward five months, Bitcoin’s value has rocketed from US$3,000 to over US$16,000 with momentum accelerating. Accordingly, it is appropriate to re-visit the discussion.  While we remain cautious, we do not pretend to know if or when the trend will reverse.  Nevertheless, it is important to understand some of the reasons for the parabolic move and the options that investors have to gain access.

First, why has the price accelerated?  To answer this question, we thought a metaphor would be appropriate, and for this we look back to 1999 and the rise of the internet.  Cisco (NYSE: CSCO) specialized in network hardware, essentially selling the gear that made the internet work.  CSCO was a proxy for the internet itself and investors bid the price up 80x in the four-year period to 2000 to a market cap of $555 billion.  Many market participants were calling for a trillion-dollar market cap, with one notable exception, Warren Buffett. In 1999, Berkshire Hathaway Inc.’s stock was down 23% while the S&P 500 index climbed 18%, leading many to think Mr. Buffet had lost his touch.  Since then, the internet has proven not to be a fad, while CSCO’s price dropped 83% in 2000. Those that invested near the top are still sitting on a 53% loss. Will Bitcoin’s chart match CSCO’s fly and fall?  Perhaps not, but Bitcoin has become a proxy for blockchain technology just as CSCO represented the World Wide Web.  The cryptocurrency seems to rise materially any time a new company indicates they are examining blockchain to help their operations. Ironically, these potential users of blockchain technology are not necessarily proposing to engage with Bitcoin; in fact, they may be creating a substitute.

CSCOSecond, how can you gain exposure to Bitcoin? There are many crypto wallet exchange companies like Coinbase or Coinmama that allow users to purchase full or incremental coins using their debit or credit card through a personalized account.  While easy to set up and transact, fees and limits on quantity inhibit an investor’s ability to build a material position.  This morning (07-Dec-17), nearly $64 million in Bitcoin was stolen by hackers who broke into Slovenian-based Bitcoin mining marketplace NiceHash.  To invest through a traditional exchange, users can purchase the Bitcoin Investment Trust (OTC: GBTC).  However, the ratio of 0.092 Bitcoin per share of GBTC indicates a 50% premium to the price of Bitcoin.  Fortunately (or maybe unfortunately?), it will shortly become easier to participate in Bitcoin through futures trading.  CBOE Global Markets is due to launch its bitcoin futures exchange on 10-Dec-17. The CME Group Inc. is due to launch its version on 17-Dec-17.  Futures trading will be offered to retail investors through brokers such as Fidelity as early as 18-Dec-17.  However, managing the margin to be involved with futures trading will be unfamiliar and risky to many.  The link below is a good explanation for those interested in learning more about futures trading.

Blockchain technology is revolutionary and it will be completely disruptive as its applications are adopted and evolve.  Bitcoin seems to be the proxy for the rise of the technology. It’s potential as a transactional currency and store of value creates the opportunity for greater gains.  But, the possible risks from competition and alternate technologies make it difficult to jump in after this parabolic rise.  If an investor chooses to speculate, they must be prepared for significant price volatility and the possibility of permanent loss of capital.

How CME Group’s Bitcoin Futures Will Work