I've already explained why Bitcoin cannot go to zero. Now investors need to understand that even if Bitcoin is pushed to the side, blockchain isn't going away because Central Banks love it. Therefore, you will want to consider your bets in Bitcoin and blockchain. Mitigate the risks, maximize the return.
Does The Government Accept Bitcoin?
I've received a lot of feedback in public and private about my articles on cryptocurrencies. In one recent article, Bitcoin Vs. PayPal (NASDAQ:PYPL), one reader expressed what many people have been thinking:
...my gut feeling is that it is a candidate to be one of the biggest financial asset/value destrction [sic] at some time in the future, I imagine that Global reserve currecny [sic] Central banks will not allow their most valuable power to be taken away by digital tech nerds, so they can easly [sic] out law it once they see the threat getting big enough or it becomes de facto currecy [sic] of crime cartels...
In short, the idea is that the government will never allow Bitcoin to survive. It will crush Bitcoin before it gets too big. It hates Bitcoin.
Indeed, as Fortune tells us:
Big governments cannot tolerate Bitcoin, the digital currency that threatens to break their monopoly on printing money, and to manipulate the economy to accommodate the interests of powerful elites.
At the same time, we know there is activity on top of Bitcoin, in the form of Grayscale Bitcoin Investment Trust (OTCQX:GBTC) and the Winklevoss Bitcoin Trust ETF (COIN). Bitcoin hasn't been crushed like a cockroach under the boot.
But there are cracks. For example, with GBTC:
Both the Bitcoin Investment Trust and the Ethereum Classic Investment Trust are private investment vehicles, not registered with any regulatory agency of any jurisdiction, and are NOT subject to the same regulatory requirements as SEC-registered exchange traded funds or mutual funds [emphasis added], including the requirement to provide certain periodic and standardized pricing and valuation information to investors.
The BIT’s shares are publicly quoted on OTCQX® market under the OTC Market’s Alternative Reporting Standards, which do not require the same level of public disclosure as the Securities Exchange Act of 1934 [emphasis added] standards applicable to SEC-registered investment vehicles.
Therefore, we know that we can get GBTC into an IRA, and get "skin in the game" with Bitcoin quite easily. But it's not like there is an extra layer of safety from the government for investors.
The government is neither for nor against GBTC, and investors might feel safe because GBTC is so easily bought and sold via brokers, and put in IRAs for example. There are mixed messages.
Keep in mind there is an extra price to pay with GBTC. I've previously explained that Grayscale Bitcoin Investment Trust has indicated that the normal premium over investing directly in Bitcoin is 42%. Well, let's do the math today:
- For every share of GBTC, you get 0.09258535 Bitcoin.
- One share of GBTC today would cost you $719
- The market value of 0.09258535 Bitcoin is $392.56 today
- Therefore, the premium is about 83% above the underlying Bitcoin
To summarize, the government is mostly in a holding pattern on Bitcoin. Obviously, Bitcoin hasn't been killed by the U.S. government. But it hasn't approved and endorsed it either.
Now, let's shift gears. What if the government cracks down on Bitcoin? I will prove that even if the government crushes Bitcoin, you can still do well because of blockchain.
Bitcoin In Government and Central Banks
We return to the idea that Bitcoin could die through government and politics. But we know that the technology powering Bitcoin is blockchain, and the genie is out of the bottle. More important? Central banks love it.
The central bankers do not want their institutions to own or use Bitcoin itself. Instead, they hope they can use the decentralized method of record-keeping introduced by Bitcoin [emphasis added] - known as the blockchain or distributed ledger - to complete and record transactions in the real economy more efficiently, quickly and transparently.
Plus this tidbit:
If the central banks succeed, it would be one of the greatest unexpected twists in new technology: An invention aimed at dethroning central banks and making it harder for money to be tracked instead ends up empowering those central banks and making money more easily traceable.
Indeed, the Bank of England has even said blockchain could...
...permanently raise GDP by as much as 3% [emphasis added], due to reductions in real interest rates, distortionary taxes, and monetary transaction costs.
The truth is that Central Banks love blockchain and they are aggressively investigating it. Of course that doesn't mean they love and embrace Bitcoin.
Then again, beyond the U.S., some governments are directly embracing Bitcoin not just blockchain:
- Japan accepts Bitcoin as legal form of payment
- South Korea: Bitcoin can coexist with fiat currencies
- Australia will treat Bitcoin just like money
So, pressure is mounting in this space from multiple angles. There's great uncertainty about Bitcoin but clarity on blockchain. Again, we're going to have to look at options for investing, and moderating your risks.
Digital currencies and blockchain are here to stay. Some governments around the world are directly embracing Bitcoin. They are embracing cryptocurrencies and certainly the technology that powers the infrastructure.
The Central Banks' Safety Net
Make no mistake about any of this. Central Banks are on top of this right now. Indeed, according to the IMF, 15% of big banks will be using blockchain by the end of this year. Furthermore, Dong He, who has lead research into digital currencies at the IMF, believes that the switch to digital currencies, by central banks could happen in the next five to ten years But this depends on the speed at which the banking system moves to using the blockchain for financial transactions.
The biggest reason is that Central Banks cannot leave blockchain to chance. They need to maintain control. So, while Bitcoin is a nuisance right now, blockchain is a new set of handcuffs and they want the keys. The tracking and accountability using blockchain is happening today.
Play the Bitcoin and Blockchain Investment Game?
With the "Central Banks Safety Net" in your mind, what are your options for investing in Bitcoin and blockchain? It's important to get a bit creative here.
First, you can simply invest directly in Bitcoin (e.g., using Coinbase). That gives you direct access but the highest risk.
Second, you can invest in Grayscale Bitcoin Investment Trust. The NAV tracks the Bitcoin market price, less fees and expenses. You'll pay a 2% annual fee for that privilege. There are reasons why GBTC is superior to directly holding Bitcoin, so wrap your head around that. This is also a very high risk, noting especially the premium to NAV mentioned above.
Third, you can invest in Bitcoin mining via a company like MGT Capital Investments (OTCQB:MGTI). There's a bit less risk because MGTI isn't "all in" on Bitcoin. It's also into cybersecurity and privacy hardware.
Fourth, you can also invest in the hardware that powers Bitcoin mining, such as Nvidia (NVDA) and Advanced Micro Devices (AMD). Obviously, NVDA and AMD are not "all in" on Bitcoin but instead have diverse product portfolios.
Fifth, you can invest in companies that provide Bitcoin services like Bitcoin Services, Inc. (OTCPK:BTSC). They mine Bitcoins but also offer escrow services, for example. If Bitcoin gets killed, BTSC is highly exposed.
Sixth, you can invest in companies that focus on Bitcoin technologies like IBM (IBM). If you go big, like IBM, your risks are dramatically smaller because of moderate Bitcoin exposure. I've talked about this in several ways. Here are two recent examples of IBM's blockchain exposure:
It's likely that other companies will enjoy the benefits of Bitcoin acceptance. For example, a natural extension would be e-commerce players, but that starts to stretch the investment thesis.
If you're worried about a crash in Bitcoin, the highest risks are obviously going to be direct Bitcoin investment, GBTC, MGTI, and probably BTSC. The lower risks are likely going to be NVDA, AMD and IBM. Obviously this risk spread is all about size and focus, and not having all your eggs in one basket.
If you're concerned about investing in Bitcoin but you still want to ride the technology shift, including Central Bank support, there's a simple approach. Moderate your bets by investing in companies like IBM that are embracing blockchain and happen to have deep roots in the financial sector. Similarly, NVDA and AMD are reasonable candidates for further due diligence:
...according to MIT Technology Review editor David Rotman, Nvidia’s explosive growth in the AI and Blockchain markets gave the firm an edge over other companies.
Semiconductor firm Advanced Micro Devices has recently launched a beta version of its new Radeon Software Crimson ReLive Edition Beta for Blockchain Compute graphics card driver.
Based on the release notes from the company, the driver will boost performance for “Blockchain Compute Workloads,” thus bolstering the efficiency of digital currency mining computers that use a graphics processing unit (GPU) for mining.
In short, you can play the Bitcoin and cryptocurrency game and moderate your bets by looking at Central Banks for insight and support. While it's unclear where Bitcoin will head in the future, it's extremely likely blockchain will survive and even thrive. That's a conservative approach versus speculating in Bitcoin and Ethereum directly.
Central Banks love blockchain. They see massive savings, along with tremendous efficiencies. It's also obvious that when implemented how they want, they gain power and control. As in investor, that means clarity and certainty of support in the technology. You can ride the Bitcoin and cryptocurrency wave while enjoying lower risk.
Taking a step back you now understand that you can choose your level of risk. It's not all or nothing. Furthermore, even if you don't directly put money into Bitcoin, you have opportunities that roughly mirror the rising tide, due to the rapidly growing delight with blockchain by the banking elite.
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Disclosure: I am/we are long IBM. 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.
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