Faithful, and even sporadic, readers should be well aware of my affection for time-tested market adages. There is a reason why many of them have persisted for decades, if not longer: they tend to work. Over the past couple of weeks, we got a chance to see one of my favorites in action.
Two weeks ago we wrote a piece entitled, “Bitcoin ETF: Buy the Rumor, Sell the News?” The buzz surrounding the anticipated approval and launch of bitcoin ETFs had become near-deafening. I was getting a range of questions about them from people both within the financial services industry and from those with little connection to it. Much of the enthusiasm centered around the notion that bitcoin ETFs would enable a wider range of asset managers to give their clients exposure to cryptocurrencies, yet I knew of none that actually intended to do so – at least not immediately. That got my “Spidey Sense” tingling.
The price of bitcoin had roughly doubled in the three months prior, and while almost all risk assets had risen sharply during that period, bitcoin had far outpaced almost all of them – including Ethereum. I took the relative outperformance of the leading cryptocurrency versus its next most popular counterpart over that timespan to be the best proxy for measuring the added enthusiasm that was being priced into bitcoin. I realized that it was substantial, and thus began to lay out my thesis.
Among the points we made at the time were:
So, now that the finish line is in sight, will investors be clamoring for the ETFs that are expected to arrive? They certainly shouldn’t lack for choices… It would of course be advantageous for a wider range of individuals and institutions to be able to access Bitcoin via an ETF, but it is not clear how many of them are desirous to do so in the immediate future. Some will certainly succumb to the initial hype, but the key would be if there is follow-through over the coming weeks. That is uncertain.
Thus, we see an underlying asset that has appreciated dramatically in a short period of time ahead of a well-telegraphed event. There is an enormous theoretical demand for the product, but it is not clear that the demand will be immediate. Finally, there is a potential large seller lurking in the weeds. This is the sort of convergence that leads to a “sell-the-news” reaction after a lengthy period of “buy-the-rumor.” We’ll know soon enough if this well-known market adage holds true once again.
In the second paragraph above, I mentioned the idea of a large potential seller lurking in the weeds. I believe that this aspect was under-appreciated by most market observers, even though its potential was well-disclosed. We noted:
There is also a potential negative catalyst lurking. At the end of November, the FTX bankruptcy estate was given permission to start selling $744 million in Grayscale assets, the bulk of which are held in GBTC, and presumably worth more than they were about six weeks ago. It would be understandable if the bankruptcy trustees would wait until the persistent discount in GBTC fully evaporated before selling those assets. That seems like a significant overhang for cryptos in general and Bitcoin specifically.
According to a published report, that selling appears to have finally been acknowledged publicly and has now abated. Combined with the over $10,000 drop in the price of bitcoin from the euphoric, momentary high reached in the immediate aftermath of the ETFs’ listing through this morning, it seems like an appropriate time to acknowledge that this particular “buy-the-rumor, sell-the-news” trade may have run its course.
I’ll now return to my usual role as a crypto agnostic. I am hopeful about the prospects for blockchain, even if its real-world applications have thus far proven elusive. And until cryptocurrencies have definable uses in mainstream financial transactions, I’ll continue to treat them as purely speculative. But despite the faithful’s ever-present desire to portray cryptocurrencies as having special status (like the commentor on my piece who wrote, “It’s funny listening to boomers and clueless people talk about Bitcoin”), speculative assets follow somewhat predictable patterns of human nature. And that is where old adages come in handy – even for the most cutting edge financial innovations.
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