There are many today who believe the vertigo-inducing rise in value of bitcoin — up 643 per cent in the past 12 months and more than 4,000 per cent 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 money where their mouths are and actually make a bet against the value of bitcoin. That is because attempting to time a market is ill-advised, and never more so than when betting against 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 crippling losses if the bet’s timing is 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.
The market capitalisation of the Bitcoin Investment Trust is today worth $1.45bn, or a premium of 90 per cent over the current market value of the bitcoins that it owns. This premium over net asset value shrinks to 70 per cent if investors include the value of its holdings of “bitcoin cash”, an offshoot coin recently issued to holders of the original. This massive valuation premium is 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. And they will be positioned to profit if the market finally decides that the huge premium at which the trust’s shares currently trade above the value of its underlying coins makes no sense at all.
miles.johnson@ft.com