It's my view that bitcoin is the modern equivalent of Beanie Babies, something people "invest" in under the premise that someone else will be willing to pay an even higher price for it later. It's a financial bubble in pure form, and making it easier to buy bitcoin with an ETF would probably only add more fuel to the fire.
But I'm willing to admit that the alternative isn't much better. Speculators eager to get their cryptocurrency fix are turning to questionable securities that, in my view, will only lead to worse outcomes than might result from investing in a proper bitcoin ETF.
Before writing off a bitcoin ETF as an unnecessary vehicle for speculation, take into consideration how retail investors are betting on cryptocurrencies today. One of the most popular stocks at online discount brokers is Bitcoin Investment Trust (NASDAQOTH:GBTC), the closest thing to a bitcoin ETF on the market right now.
The trust owns roughly 0.092 bitcoins per share outstanding, but because it doesn't allow for easy creation or redemption, a feature of ETFs, it often trades at a ridiculous premium to net asset value. On one half of trading days, it closed at a price at least 42% higher than the value of the bitcoin it owns.
Even if you knew bitcoin would be worth 10% more tomorrow, buying Bitcoin Investment Trust is an uncertain wager. On one day in September, Bitcoin Investment Trust plunged by more than 20%, even though the price of bitcoin increased about 2.5%. In December, the trust soared 12.4% on a day when bitcoin declined 16%.
Weird swings in price are hardly rare. On roughly one-third of trading days, Bitcoin Investment Trust has moved in the opposite direction of bitcoin, making it almost as useful as a random number generator as it is a bitcoin tracker. Lacking in any workable alternatives (like a true bitcoin ETF), mom-and-pop investors have made it one of the market's most actively traded bitcoin stocks by dollar volume.
A boom in sketchy bitcoin operators
Those who want to invest in cryptocurrencies through companies that provide the picks and shovels to the bitcoin boom have a suspect list of stocks to choose from. Questionable corporate issuers are providing the supply to meet persistent demand for all things bitcoin-related.
Riot Blockchain (NASDAQ:RIOT), a failed biotech company turned cryptocurrency investor, has a litany of red flags, including a revolving door of executives and auditors, yet the company raised $37 million selling warrants and common stock to investors in December. Shortly after raising millions of dollars, Riot announced it was adjourning its December 2017 annual meeting until February.
Long Blockchain, once a struggling beverage company known as Long Island Ice Tea, has found new life as a bitcoin business. The company, which would have been delisted from the Nasdaq marketplace if not for the fact it put "blockchain" in its name, saw its share price soar high enough to meet the market's rules on minimum market caps for listed companies, according to Bloomberg. It recently filed to raise $8.4 million in a stock offering to buy 1,000 bitcoin mining machines, but has since reversed course, announcing the news that it was dropping its plan to issue stock on its website, LongIslandIcedTea.com. (It still plans to buy the mining hardware some way, though with very little cash on hand, and limited financial backing, it's hard to see how it will do that.)
Future FinTech Group, a company that skirted a Nasdaq delisting notice by generating a pop in its stock with news that it entered into an agreement to produce a "Globally Shared Shopping Mall blockchain software system," is yet another company in a long list of blockchain companies in name only trading on SEC-regulated markets. Its corporate website still shows bottles of juice on its homepage, a homage to its legacy business of selling juices under the name "Skypeople Fruit Juice," which it ditched in June 2017.
Finally, we have Chinanet Online Holdings Inc., a company that soared on Jan. 4 after publishing a buzzword-heavy press release that said it would "gradually shift from information services to transaction services for business opportunities to create a multi-industry cross-chain value-based internet sharing entity," whatever that means. Details are few and far between on how it plans to turn a money-losing online advertising business into a booming cryptocurrency company, but one press release was enough to send shares soaring nearly 1,000% at their peak after its announcement.
Relative to these four crypto stocks, all of which trade on an SEC-regulated exchange, the Nasdaq, a true bitcoin ETF seems benign. Yet the SEC has stood in the way of bitcoin futures-based ETFs, as Direxion, Exchange Listed Funds, and ProShares have all withdrawn their proposals for a bitcoin ETF in recent days, citing SEC concerns about them. Early last year, the SEC similarly slapped down several bitcoin ETFs that planned to purchase bitcoin and hold it in much the same way gold ETFs hold physical gold.
No laughing matter
The Securities and Exchange Commission is obviously aware of the boom in questionable companies that are turning into "bitcoin companies" overnight. The regulator's Fort Worth office recently tweeted a joke about adding "blockchain" to its name to expand its following.
We're contemplating adding "Blockchain" to our name so we'll increase our followers by 70,000 percent.— SEC Fort Worth (@FortWorth_SEC) January 8, 2018
The SEC has an important role as the financial market's most important regulator. On its website, it definines its role with a three-part mission statement that includes:
- Protecting investors.
- Maintaining fair, orderly, and efficient markets.
- Facilitating capital formation.
Allowing blockchain companies in name only to raise capital freely while stymieing efforts to create a bitcoin ETF calls into question whether the SEC is sending an implicit message that questionable cryptocurrency stocks are somehow more legitimate than bitcoin ETFs that would simply track the price of bitcoin, up and down.