Is Bitcoin The Holy Grail?
Bloomberg posted a video snippet of Senior Analyst Eric Balchunas recapping comments about bitcoin from a conference earlier in the week citing Michael Sonnenshein from Grayscale who said bitcoin is uncorrelated alpha, the holy grail of investing based on inquiries from endowments and other similar investment pools.
Grayscale of course lists the Grayscale Bitcoin Trust (GBTC) and is due to have its Etherium trust start trading soon as well, so Grayscale certainly benefits from the grail trade. ETF providers are falling all over each other to offer funds as the market is opening up to them thanks to the start of futures trading. ETFs would stand to be better able to avoid the huge premiums that are inherent in GBTC’s structure. Premiums are not impossible with ETFs but less likely, but we will know soon enough.
Uncorrelated alpha does not mean perpetual alpha. I am by no means taking a get off my lawn stance on bitcoin or the other cryptocurrencies but it is clear that people are repeating behaviors from past manias in terms of disregarding risk under the presumption that this is different.
Taking some off as it goes higher, no matter the asset class is never a bad idea. I saw a Tweet, quoting Charlie Munger that there are always people getting rich faster than you and that you should calm down about it. This quote gives permission to sell a little. There have been numerous crashes in bitcoin and there is no reason that it couldn’t get to $100,000 by way $2000 with more crashes along the way. It is possible that it will be another cryptocurrency that is the one to go to $1 million or it could all go poof. There is no reason to ride out any violent ups and downs with life changing account balances.
The idea of uncorrelated alpha is interesting, but I am not sure the idea stands up with bitcoin. How much of the trading in bitcoin is driven by emotions whether we’re talking about greed, FOMO or jealousy (of other people making money)? While precisely unknowable, whatever bitcoin’s intrinsic value is not 148% more than it was a month ago (that’s right, per Google Finance). For now, it might be better defined as unanalyzable alpha. That doesn’t invalidate maintaining a speculative position but there can be no expectation for any particular result be that for returns or correlation.
One idea that occurs to me is whether bitcoin has become an outlet for the volatility that is lacking in the equity markets. This may not be an original thought of mine, not sure, but I think it is an interesting question. A while back I wrote a post over at Seeking Alpha about not needing to trade much in a market that goes up 0.2% every single day provided the correct asset allocation decision was made, that is owning stocks.
It could be as simple as volatility needs an outlet and bitcoin is it as a byproduct of QE having dampened equity volatility creating a speculative fervor over bitcoin. It’s just a theory and if it holds water it could contribute to a bad ending for the Bitcoinerians, very bad. If that is right it still wouldn’t invalidate the transformative opportunity.