Tech investment guru Cathie Wood is still a big believer in bitcoin, so it was fitting that she chose Grayscale Bitcoin Trust as her stock pick for the 2023 Sohn Hearts & Minds Investment Leaders Conference.
Addressing attendees via video link from St Petersburg, Florida, the CEO and founder of ARK Invest, said a “negative” for Grayscale right now was its steep fee of 2 per cent per year.
She also noted that the Grayscale securities traded at a 12 to 13 per cent discount to their net asset value. However, she thinks that discount will disappear if the Securities Exchange Commission approves a spot bitcoin exchange-traded fund, as she expects to occur in the next few years.
“It does appear that the SEC here in the United States is likely to approve a spot bitcoin ETF within the next few months, and that will be the seal of approval that institutions have been waiting for, before they move into this new asset class,” Ms Wood said.
Grayscale Bitcoin Trust invests solely and passively in bitcoin, giving investors exposure to the cryptocurrency via a security, while avoiding the challenges of buying and safely storing bitcoin directly. Its shares are designed to track the bitcoin market price, less fees and expenses.
“That is what we are talking about here, a new asset class,” Ms Wood said.
“Institutions know that the best way to increase returns per unit of risk is with the diversification associated with a new asset class with low correlation to other asset classes.”
Another factor backing her case for bitcoin and ultimately the Grayscale trust is technological. “Bitcoin is going through the next halving – the rate of growth and supply of bitcoin is going to halve next spring – and it’s already below 1 per cent, so we’re talking about very slow growth in bitcoin (supply),” Ms Wood said.
“We also know that bitcoin is mathematically metered, to top out at 21 million bitcoin or units as the halvings continue over the next years.”
With 19.5 million bitcoin currently outstanding, she sees a “scarcity factor” that’s going to have an impact in 2024, especially as the institutions move in to the space, as she expects.
The third, perhaps more controversial factor, is her view on the outlook for interest rates.
“We believe that one of the reasons that risk-on assets have had a good move this year is because the markets are beginning to understand that the Fed is probably done raising rates,” she said.
It came as giant US retailer Walmart spoke about deflation in a trading update this week.
“We may be moving through a period of deflation in the months to come,” Walmart’s chief executive Doug McMillion said. “We’re happy about it.”
Also this week, revenue forecasts from Cisco Systems raised concerns that corporations were reining in their technology spending.
“I haven’t seen a drop-off this big in product orders since 2008-09,” Ms Wood said.
“So something’s going on out there.
“And as we’ve been saying for quite some time, we believe the bigger risk is not inflation, it is deflation, and that the Fed is going to have to unwind monetary policy much faster than we think most investors are expecting – if they’re expecting it at all.”
In a deflationary environment, she sees “counterparty risk rearing its ugly head again” as it did during the Global Financial Crisis of 2008. “And bitcoin is not subject to counterparts risk.”
Ark Invest first gained exposure to bitcoin when it was priced at $US250.
Now it is trading around $US36,000.
“Most people back then thought the idea of getting to $US20,000 was going to take decades and of course, two years later, it was at $US20,000,” Ms Wood recalled.
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In 2021, as bitcoin was plummeting toward $US20,000 amid the fastest US interest rate hikes since the 1970s, she was surprised by predictions that the demise of bitcoin was imminent.
In March this year she was baffled when the SEC tried to link the regional banking crisis to crypto, simply because both Silicon Valley Bank and Signature Bank were involved with crypto companies.
“That wasn’t true at all,” Ms Wood said.
“It was monetary policy gone mad.”
During the regional bank crisis, bitcoin’s price went from $US19,000 to nearly $US30,000.
“It appreciated 50 per cent as the regional bank index in the United States was plunging,” she said.
In her view that’s because bitcoin is a “flight to safety vehicle”, because it has “no counterparty risk”.
“Many people now understand – because of what happened in 2008-09 – what counterparty risk is and how the financial system seizes up.
“Well, with the bitcoin blockchain, because it’s completely decentralised, completely transparent, there is no counterparty risk,” Ms Wood said.
“I believe many people are beginning to understand what a great insurance policy bitcoin is.”
This article was originally posted by The Australian here.
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