BITCOIN UPDATE

Shorts have been squeezed out - and "value" will need to drive further appreciation.

In 2021 there have been a number of changes in the financial characteristics of bitcoin. The first and most fundamental has been its much more widespread acceptance, and increasing participation. Using the Grayscale Bitcoin Trust (GBTC) as a measure of increase participation, shares outstanding has risen 7 times since 2018, and particularly in 2020.

GBTC used to have a large short interest, as a liquid way of being bearish on bitcoin. However this short interest has largely disappeared.

The increasing liquidity of bitcoin, and reduced short interest has seen GBTC move from a substantial premium to NAV to a discount. In my mind, the GBTC premium from 2015 to 2020 represented a combination of scarcity of ways to invest in bitcoin, and a large short position in the trust. The discount we see today represents the widespread adoption of bitcoin and collapsing short interest.

Somewhat unusually, volume traded in bitcoin (according to coinmarketcap.com) has been drifting lower through all of 2021.

I don’t know what the intrinsic value of bitcoin is - only time will tell on that one. But from a financial positioning perspective, bitcoin shared some similarities with meme stocks such as Gamestop (GME) and AMC Entertainment (AMC). Certainly, both meme stocks and bitcoin have been popular on online forums such as Reddit.

Meme stocks and bitcoin have been weak recently in line with more broader market weakness. But what they also have in common is that short interest has also collapsed.

Liquidity injections combined with bearish positioning, can cause assets to move substantially. But when liquidity ebbs, and short positioning is non-existent assets tend to trade much heavier. Meme stocks and bitcoin seem to have exhausted short squeeze potential, and will need to trade much more on value merits going forward.