Summary We maintain a strong-sell rating on Bitcoin due to a lack of use cases other than trading and speculation. However, the risk/reward for blanket shorting Bitcoin is not as attractive as in 2021-2022. We believe Grayscale Bitcoin Trust, a closed-ended Bitcoin Trust, with a ~40% discount to NAV is a good hedge for Bitcoin price appreciation. Bitcoin can be shorted through an ETF such as BITI or crypto trading platforms such as Coinbase or Binance. We maintain a strong-sell rating on Bitcoin Previously, Biotechvalley Insights published a short thesis on cryptocurrencies on May 2021. We maintain a strong sell rating on Bitcoin (BTC-USD) as the fundamentals behind it have not changed; in fact, we believe it worsened with various negative news flow (i.e., Terra Luna (LUNC-USD), the FTX (FTT-USD) scandal, the bankruptcy of various cryptocurrency-related banks and hedge funds) plaguing the market sentiment and diminishing the trust around the crypto-hemisphere. Long GBTC, short Bitcoin After we published our article, as we expected, cryptocurrencies got obliterated, driven by rising interest rates and changes in market sentiment to risk-off investments, falling below $16,000 per Bitcoin at one point. Even though we do not intend to long any cryptocurrency at this time, we believe it is risky to short it at the current level as there could be a bear market rally considering the fact that Bitcoin price is heavily driven by retail trading. As such, we believe it is important to hedge your risk just in case there could be a volatile movement in bitcoin prices. We believe going long the Grayscale Bitcoin Trust (GBTC) and shorting B itcoin through Coinbase ( COIN ) or a Binance (BNB-USD) account or Bitcoin-related ETFs to be an excellent pairs trade because of the following reasons. GBTC is currently at a ~40% discount to NAV, meaning that you can get a 40% discount on Bitcoin by buying GBTC compared to buying it in other vehicles (i.e., Coinbase or other Bitcoin ETFs); this means that if Bitcoin falls further, your short will gain at a similar rate as GBTC loses value, and if Bitcoin appreciates or somehow GBTC successfully converts into a spot ETF structure (with close to 0% discount to NAV), then the discount to NAV would narrow close to zero (in theory), which would constitute a 40% gain from the current level. We believe the chance of GBTC successfully converting to spot ETF is slim based on the recent comment from the SEC ; however, even if that doesn't happen, if Bitcoin appreciates in value, we believe the chance of the discount to NAV narrowing is high, making our thesis actionable for investors. GBTC discount to NAV (Y Chart) Risks to the investment thesis However, this strategy does not come without risk, as there is always a lingering risk of the Grayscale Bitcoin Trust or Coinbase defaulting, and investors may lose all of their money. Furthermore, even in a potential scenario of Bitcoin's price appreciation, there is a probability that the discount to NAV does not narrow down to 0% or perhaps fall due to an increase in competition from crypto-related stocks or other cryptocurrency futures ETFs. Considering the fact that both companies and instruments are public companies, we believe it is less likely to go bankrupt than private cryptocurrency-related enterprises such as Terra Luna or Sam Bankman-Fried's FTX, which allegedly turned out to be a fraud. Furthermore, in the case of the Bitcoin price collapsing further, the discount to NAV widening more than the decline of Bitcoin price remains a concern; however, we believe the current level of discount to NAV is excessive even if we are bearish on Bitcoin and believe there is a higher chance of the discount narrowing than widening. Conclusion We continue to believe Bitcoin has close to no utility (and value) other than speculation and trading. We advise our readers to read our article on Bitcoin and cryptocurrency that we wrote in May 2021 for detailed analysis as many of the things we predicted have played out. However, due to the recent price decline in Bitcoin, naked shorting Bitcoin became riskier, and we believe going long GBTC and shorting Bitcoin through crypto exchanges to be a relatively low-risk arbitrage strategy for investors. We believe investors can profit or at least not lose money regardless of the movement in Bitcoin prices.
