Bitcoin: The End Of The Beginning

Summary

• Bitcoin prices continued to plunge this weekend, tumbling below $2,000.
• Other leading cryptocurrencies have dropped even more; Ethereum has lost more than half its value recently.
• GBTC remains wildly overvalued, compared with its NAV.
• However, blockchain is here to stay, even as prices plunge.

I last discussed Bitcoin here at Seeking Alpha on May 25th. My article was a warning headlined Bitcoin Getting Dangerous Up Here.

It was well-timed - the Bitcoin Investment Trust (OTC:GBTC) hit its all time high on May 25th at $565/share. Bitcoin itself hit $2,700, and would eventually touch $3,000 briefly in early June. GBTC would never again reach $565, though, as its premium to net asset value "NAV" started to slide.

Since the top in early June, Bitcoin had largely traded sideways in the $2,500-$2,700 area. However, pressure has been to the downside, with each rally stalling out sooner. Last week, the pressure came to a head and sellers overwhelmed the currency, slamming it below $2,500 and then quickly taking it under $2,000 over the weekend:

On Sunday, prices hit levels not seen since early May before attempting a modest rally as of this writing. Bitcoin, as the biggest and most branded digital currency, held up longest. Other leading cryptocurrencies such as Ethereum cracked much sooner and harder - Ethereum has lost more than half its value since it peaked in early June, and the selling lately has been relentless:

What's Next For The Digital Coins?

The first and most obvious takeaway is that GBTC - the investment trust - remains uninvestable. As of Friday, it closed at $375/share despite having just $211/share in assets. This is a horrendous valuation gap, paying almost $2 for every dollar of assets:

GBTC has tended to trade at a small premium to its NAV. And that makes sense, there is some value in being able to buy Bitcoin on the stock exchange (even if via the bulletin board) as opposed to buying Bitcoin directly. However, a normal premium would be something closer to 10 or 20%, rather than almost 100%.

With Bitcoin now trading under $2,000, GBTC's NAV is down to $180 give or take a few bucks. The last quote of $375 is still vastly elevated, and GBTC could tumble in coming days if sentiment doesn't swing, and quickly.

More broadly, Bitcoin is under fire due to concerns that the technology may fracture as chain-split risk continues to increase ahead of the August 1st deadline. On the first, a user-activated soft fork is to take place, changing Bitcoin's core protocol. However, it's far from clear that this effort will be a success.

This sort of uncertainty is anathema to a speculative alternative currency attempting to gain widespread acceptance. Given the unprecedented price volatility and technological concerns, it should come as no surprise that just three out of the world's top 500 online retailers accept Bitcoin. And that number is worse than it sounds, since previously five had accepted Bitcoin but several retailers have retreated recently.

Overstock.com (OSTK) is one of the only prominent US retailers to accept Bitcoin. And even there, uptake is minimal - the company reports keeping half of its Bitcoin-denominated sales in the cryptocurrency - despite that it had just $307,000 in Bitcoin assets as of its last 10-K filing (page 107). That's small potatoes. Ignore the hype from boosters, retailers simply aren't accepting alt-coins in any meaningful capacity.

That said, it's far too soon to declare the demise of cryptocurrencies. 2017 is the first time that they went mainstream as an asset class, and as with most new things, the initial investor euphoria often leads to messy results.

Throughout history, just about every major new technology from railroads and autos on through to the internet has fueled massive speculative bubbles wiping out most speculative gamblers before eventually creating great wealth for a few more far-sighted investors.

The blockchain appears no different. People have been throwing hundreds of millions of dollars at totally new unproven startup rival coins and blockchains. Classic speculative top behavior, just as people rushed to throw their life savings at the likes of Pets.com, Boo.com, and Flooz.com. Now Potcoin is worth $15 million after spending most of its life with a market cap under $200k - in the investing world, every speculative mania repeats sooner or later.

Cryptocurrencies are crashing now, just as tech stocks did in 2000. That shouldn't come as a surprise. But like dot-coms, this is the end of the beginning. Blockchain, like the internet, is likely to become a permanent part of the financial infrastructure. At least a few of the hundreds of cryptocurrencies now trading are likely to be worth much more in the future than they are today (though the vast number of them will end up near-worthless).

While you're likely to hear fewer rags-to-riches stories about overnight crypto-millionaires going forward, make no mistake, this speculative mania has served at least one purpose. Now blockchain has entered the mainstream, offering a real challenge to the often conservative banking industry. That may be of little relief to underwater Bitcoin or GBTC stock holders, but as investors, it is worth paying attention to. Don't let plunging cryptocurrency prices lead you into thinking the technology is dead with it.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.