In the last 12 months, the value of bitcoin has risen by 643 per cent, and could yet double or quadruple before the bubble bursts. The FT's Miles Johnson explains how investors can still profit by betting against its value.
Produced by Filip Fortuna. Filmed by Rod Fitzgerald.
There are many today who believe that the vertigo-inducing rise in the value of bitcoin, up 643% in the past 12 months and more than 4,000% over five years, represents the greatest parabolic bubble of modern times and one that is primed to suddenly and violently pop. At the same time, next to none of these cryptocurrency sceptics are foolhardy enough to put their own money where their mouths are and actually make a bet against the value of bitcoin.
That's because attempting to time a market is ill advised and never more so when betting against what you might think is a bubble. As hedge fund manager David Einhorn once observed, "twice a silly price is not twice as silly; it's still just silly." Or in other words, just because an asset's value has become detached from reality does not mean it cannot double or quadruple further before the day of reckoning finally arrives.
So how does one bet against bitcoin without taking the risk of suffering a crippling loss if the bet's timing is a bit off? Not only is it volatile and illiquid, it is also difficult to find any reputable counterparty willing to take the other side of the trade. A neat alternative solution has been offered up by short-seller Andrew Left. He has set his sights on the Grayscale Bitcoin Investment Trust, a US-listed investment vehicle that owns more than 170,000 bitcoins. Today the market capitalisation of this bitcoin investment trust is worth $1.45 billion, or a whopping premium of 90% over the current market value of its bitcoins.
This premium over net asset value shrinks slightly to 70% if investors include the value of its holdings of so-called bitcoin cash, an offshoot coin recently issued to holders of the original. But this massive valuation premium is really impossible to justify even when taking into account the novelty value of the trust allowing investors to gain exposure to bitcoin on the stock market.
That creates a less risky opportunity for bitcoin sceptics. They can sell short shares in the trust while at the same time buying a corresponding amount of bitcoin as a hedge in case the trust rises further in value. And they will be positioned to make a hefty profit if the market finally decides that the huge premium of which the trust shares currently trade above the value of its underlying coins makes no sense at all.