Every asset and market has an overarching narrative that frames investor behavior. Essentially, investing is taking imperfect information and forming a picture of the likely future. Due to the high degree of subjectivity, investors need a simple yet powerful narrative to guide their decisions. Failure to recognize the prevalent narrative for a particular asset will almost always lead to steep losses for one’s portfolio.
Starting in 2013, Bitcoin burst forth onto global investors’ radars. Previously it was a play thing for techies and did not enjoy wide publicity or large trading volumes. Bitcoin experienced two impressive run ups that year. The first bubble, up to $250, was predicated on the narrative of governmental wealth confiscation. The world woke up to a Cypriot 10% haircut on all deposits over 100,000 Euros and thought who is next, and how to protect their wealth. Traders then began rampant speculation that citizens would turn to Bitcoin to protect their bank deposits from rapacious governments. Failure of immediate follow on theft, and the implosion of the Silk Road, ended that narrative and with it the price slumped below $60. The market then latched on to the China fantasy. Using Bitcoin, citizens of China could escape capital controls and finally enter the world economy as equals, or so the story went. The price went parabolic up to $1,200 and almost reached parity with gold.
2014 was the year of exchange malfeasance and government regulation. MtGox imploded in spectacular fashion taking $500 million of customer deposits down with it. China decided to curtail the involvement of third party financial institutions in the Bitcoin ecosystem, and the United States decided to encircle Bitcoin companies in its patchwork of dysfunctional state and federal financial regulations. As a result, 2014 witnessed a share price contraction that has continued into the early part of this year, as the price reached a low of $155.
2015 will be the year of co-option of Bitcoin into the traditional financial services network. Favoured companies will be allowed to peddle their wares to the average consumer without the merry band of financial regulators stymieing their efforts. Now that the premier global equity exchange and a former CEO of a Too Big Too Fail bank are invested in the Bitcoin ecosystem, certain things will be allowed. The most obvious and relevant choice is an ETF. Imagine a world where retail investors can buy a product that holds 1:1 Bitcoin on their E-trade and Schwab accounts. The words wallet, Blockchain, decentralisation will be nothing more than buzzwords bandied about by clueless financial media commentators. Bitcoin will be reduced to water cooler talk of how much one has made in the past week, by calling the market correctly. That is powerful, part of the equity revolution, in the 1990’s and early 2000’s, was due to the roll out of ETFs that made all manor of asset classes and global equities accessible to average investors in the richest nations globally. The influx of demand for Bitcoin because of its volatility, new technology sexyness, and non-correlation with other global assets will frame the narrative of 2015.
The mainstream media (MSM) has done a fantastic job of associating Bitcoin with ponzi schemes, drugs, money laundering, and terrorism. As a result, to the general public Bitcoin is part of the fringe element, and viewed with skepticism. That will change this year. When the guilty verdict in the show trial of Ross Ulbricht is handed down, Bitcoin and drugs will fade from the MSM lexicon. Bitcoin will begin to be referred to as an alternative asset, a speculative investment, and a disruptive new technology. If US retail investors are to invest and trade Bitcoin, the narrative surrounding the currency and technology must be altered.
The NYSE operates the most storied equities market globally. Attracting liquidity is the most important job of any exchange operator. The NYSE is very adept at selling the equities story to the general public. Now that titans of the legacy financial services industry are on board, the MSM will fall over itself to heap praise upon Bitcoin. Who better to promote Bitcoin on the airwaves than former financial services company CEOs. The financial media pundits will be fed the appropriate wallet, Blockchain, and decentralization buzzwords for use in their mindless promotion of Bitcoin to the general public.
Examining the recent “launch of Coinbase” announcements, the MSM fell over themselves to report about the “first” regulated US exchange. Coinbase was not the first US exchange to have money service business licenses. However, to the average investor, what the Wall Street Journal, Financial Times, Bloomberg, and Reuters reports is gospel. With the NYSE at one’s back, history becomes a pliable tool at one’s disposal.
The Coinbase announcement is just the preamble. The main event is a listed Exchange Traded Fund (ETF). ETFs have been one of the most powerful tools to bring average investors into the global financial markets. They are cheap ways for investors to own a basket of stocks, bonds, commodities, currencies, and other financial assets. ETFs are the prefered method for investors big and small to gain exposure to their desired asset class. Trading Bitcoin on a regulated Coinbase exchange will still be too difficult for many investors. The process of wiring money, wallets, the Blockchain, and security is just too many moving parts to handle. They would rather trade using their prefered online broker.
A Bitcoin ETF would bring a whole swath of the US investing public into Bitcoin. It would reduce the abstraction and nomenclature down to buying and selling a listed equity, with which all investors are familiar. Bitcoin is the new sexy and techy asset on the block. Investors will rush to trade Bitcoin via an ETF. The daily volatility is perfect for traders who have become tired of the, openly manipulated, traditional global asset markets.
A US listed Bitcoin ETF has been a dream of the community for some time. SecondMarket and the Winklevoss twins both have applications sitting on the Securities and Exchange Commission’s (SEC) desk. The SEC does the bidding of financial services industry titans. A wink and a nod and a Bitcoin ETF will be greenlighted. Imagine a SecondMarket ETF that used Coinbase as custodian, and as the exchange where fund managers traded Bitcoin. Say bye bye to da Moon, and hello to Alpha Centauri.