Remember how we got all excited about the approval of the Bitcoin exchange-traded funds (ETFs)?
Remember how we breathlessly compared it to the approval back in 2004 of the gold ETFs?
We even showed you a chart – the price went up, from left to right, as all price charts should!
Surely you remember… it was only last week.
Or maybe you’ve lost interest already. After all, in the days since the Bitcoin ETF approval, the Bitcoin price had fallen as much as 10%.
Today, it’s still about 8% below the pre-approval Bitcoin price.
As for the Bitcoin ETF, no surprise, it’s down too (at least it’s doing what it’s supposed to do, which is match the underlying price of Bitcoin).
So, what’s the deal? Is this an “egg-on-face” situation… or simply the markets in action? We’ll share our take below, including sharing info we should have shared with you last week.
It will help put the Bitcoin ETF story in a clearer context. More below. But first, today’s market action…
Market Data
The S&P 500 closed down 0.6% to end the day at 4,739.21… the NASDAQ fell 0.6% to close at 14,855.62.
In commodities, West Texas Intermediate crude oil trades at $72.71, up 74 cents…
Gold is $2,008 per troy ounce, down $24…
And bitcoin is $42,629, down $621 since yesterday.
Now, back to our story…
Three Reasons Why
Here’s that chart we showed you last week:
As the chart shows, within seven years of the Securities & Exchange Commission’s (SEC) approval of a gold ETF, the gold price climbed from around $400 per troy ounce to more than $1,700.
But there’s something almost unnoticeable on the chart… due to the long time frame. If we zoom in, it’s this…
For the first 10 months of the gold ETF’s existence… the price went pretty much nowhere… except… down.
It wasn’t until the “final bottom” in late August 2005 that the price finally took off.
What, if anything, can we learn from that? Truthfully, we won’t know for sure until perhaps many months or years from now.
But regardless of that, we can make three observations.
First, like many charts that go up from left to right over the long term, it proves the benefit of being a long-term investor.
Sure, we have no doubt an expert trader could have traded in and out of gold for big profits in 2004. But we’d wager a long-term investor accumulating a position over several years would have made more, with less effort… and probably less stress.
But each to their own.
Secondly, we’re not downplaying the impact or the importance of the Bitcoin ETF. That would be ridiculous given how much we made of the story leading up to it.
But what that short-term chart shows you is that the asset price still conforms to market forces. Think back to 2004 through 2005.
The market and economy were rebounding from the dot-com-induced recession. And the Federal Reserve was raising interest rates, as the chart below shows:
Gold tends to perform poorly (or “less well”) during periods of rising interest rates because gold doesn’t pay interest or generate cash flow in the form of dividends.
So investors will find gold less attractive compared to income-paying stocks, bonds, or bank deposits.
This makes sense. Regardless of the short-term burst of excitement for the gold ETF, there were bigger underlying forces at play (the Fed) that kept the gold price down.
Fundamentals Win
The same will be true of Bitcoin. The Bitcoin ETF, while a big deal, is just one of several fundamental stories supporting a higher price.
To repeat what Teeka told his subscribers in a video update in December…
Of course, everybody is enthused about the ETF. And yes, the ETF is very important.
But this is a story of the larger adoption of this asset. This is a story of people understanding that Bitcoin is worthy of their investment and their faith in the asset.
We’re asked by our government to put our faith in fiat currency, and they co-opt our belief in a higher power by putting “in God we trust” on the money. And God and money are two completely separate things.
For a state to try to co-opt our belief in a higher power and attach it to a currency that they control, manipulate, and abuse is wrong. It’s a misuse of faith.
Whereas Bitcoin keeps your faith in a higher power and faith in your currency completely separate, as they should be, in my opinion.
What Bitcoin asks you to put your faith in is the sanctity of the code and the incentive mechanisms that have created Bitcoin and have now made it one of the most valuable assets on the planet.
So I think we’ll continue to see a loss of faith in fiat currency and a continued rise in faith in programmatic stores of value such as Bitcoin.
I say stores of value. There is only one programmatic store of value that has survived, and that is Bitcoin. Everything else is a use case within the blockchain world.
There’s no competition for Bitcoin. Bitcoin has won.
Of course, while the timing was different, remember that Bitcoin has also faced rising interest rates over the past two years. Although Bitcoin has rallied since last October, it was a hard slog for most of the previous 18 months.
In short, fundamentals win.
Finally, remember Teeka’s other point, which we’ve also previously published:
All I can say is if it sells off, it’s a buying opportunity.
Every sell-off this year will be a buying opportunity.
Only the most blinkered Bitcoin enthusiast would believe the price will only ever go up. The more open-eyed Bitcoin investor knows from history the price will suffer extreme highs and lows.
If we asked Teeka, he’d probably say that he couldn’t completely rule out the price falling 20% or 30% before it moves much higher. That’s just what happens.
In fact, Teeka would no doubt tell us any move that way would only encourage him to pour more cash into Bitcoin.
And if we look back at the gold price chart from 2004, there were plenty of opportunities for investors to buy on weak price action.
That’s how markets work. Supply, demand, and price. If an asset is in demand, and the price is right, buyers will buy.
For Bitcoin, add in the fact of a programmed-in diminishing supply of new Bitcoin, and the fundamentals stack up even more.
ETFs: Ins and Outs
Speaking of the Bitcoin ETF, the Financial Times reports:
Bitcoin exchange-traded funds have pulled in just under $900 million in the first three days of trading, as investors cautiously welcome the new stock market vehicles that track the cryptocurrency.
The new funds, which include those from BlackRock, Franklin Templeton, and Invesco, have had net inflows of $871 million, according to data from CoinShares, a digital asset manager.
BlackRock, the world’s largest asset manager, led the way with $72 million of inflows, followed by Fidelity with $545 million. The inflows were offset by $1.18 billion of outflows at Grayscale, which converted its existing $28 billion bitcoin fund into an ETF alongside the new launches.
Analysts believe the bulk of the outflows is likely to be investors moving to one of the new funds, which all charge lower fees than Grayscale. Excluding the outflows at Grayscale, the 10 new ETFs have drawn in just over $2 billion.
On the first day of trading, more than $1 billion worth of shares traded in the iShares Bitcoin ETF (IBIT). Again, as a comparison to the gold ETF launch, the SPDR Gold Shares ETF (GLD) traded $266 million.
Today, the gold ETF is still streets ahead, regularly trading more than $1 billion worth. Including the launch day, the Bitcoin ETF is trading around half that daily value.
We expect it won’t stay that way for long.
Unconnected Dots
Our main task at the Daily Cut is to try to “connect the dots.” That is, we help you figure out what events are about, what makes them important, what their consequences are, and what it all means for you.
But sometimes, we see the individual “dots,” but can’t yet figure out how they connect to anything. Maybe they never will connect to anything.
Regardless, if those unconnected dots feel as though they could be important, we’ll mention them here. And we’ll let you draw your own conclusions.
Today’s unconnected dots…
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We noticed a further story of interest in the FT:
Investment firms are raising billions of dollars to buy stakes in venture capital-backed technology start-ups, as a long drought in acquisitions and initial public offerings forces early investors to offload their stock at discounts.
The start-up secondary market, where investors and employees buy and sell tens of billions of dollars worth of shares in privately held companies, is becoming an increasingly important trading venue, in the absence of traditional ways of cashing out and given a slowdown in start-up funding.
If this is the beginning of a new trend, it will be welcome news to small-cap investors. Since the market low in October 2022, the S&P 500 is up 32%.
Over the same time frame, the S&P 600 (an index of 602 selected small-cap stocks, with a market capitalization no greater than $9 billion), is up just 18%.
Small caps have lagged the market. Maybe that’s about to change.
More Markets
Today’s top gaining ETFs…
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Core Alternative ETF (CCOR) +0.4%
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WisdomTree Emerging Markets Corporate Bond Fund (EMCB) +0.3%
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iShares Interest Rate Hedged Long-Term Corporate Bond ETF (IGBH) +0.2%
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First Trust Long/Short Equity ETF (FTLS) +0.1%
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First Trust Consumer Staples AlphaDEX Fund (FXG) +0.1%
Today’s biggest losing ETFs…
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KraneShares MSCI All China Health Care Index ETF (KURE) -3.5%
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Global X MSCI China Consumer Staples ETF (CHIS) -3.4%
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VanEck Gold Miners ETF (GDX) -3.1%
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Global X MSCI China Consumer Discretionary ETF (CHIQ) -3.1%
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Invesco China Technology ETF (CQQQ) -3.1%
Mailbag
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Cheers,
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Kris Sayce
Editor, The Daily Cut