Bitcoin ETF is NOT Priced In

There has been a lot of speculation about whether the all-knowing markets have priced-in the approval of a spot Bitcoin ETF by the SEC.

The argument is that markets are efficient. Participants take all available information and then price a security or commodity accordingly.

Except, we know the efficient market hypothesis is nonsense. The 2008 financial crisis and the catastrophic collapse in the 1990s of the hedge fund, Long-Term Capital Management (LTCM) should have proven that beyond all contention, given they were predicated on the ‘genius’ financial mathematics that underpins the efficient market hypothesis.

Yet ‘priced-in’ continues to be a common refrain whenever anything is anticipated as a future catalyst. Perhaps because sometimes they are priced in. Sometimes they can be. The Bitcoin ETF CANNOT be priced in.

How Bitcoin ETFs Work

Bitcoin is a commodity, not a stock. Analysts can forecast future earnings and then calculate a present value of a share of those earnings for a stock. Bitcoin does not have earnings. The price is a function of supply and demand for Bitcoin in the market.

So, how can the price of Bitcoin reflect future demand that has not yet hit the buy side? i.e. the ETFs have not bought any Bitcoin yet. Some speculate that ETFs are front-running the approval, but Bloomberg’s ETF analyst James Seyffart dismissed that possibility in my interview with him.

Let’s think through the mechanics of the situation. I will simply for the sake of making the point, but it is essentially as I describe below:

• The Bitcoin price is going up.

• Bitcoin ETFs can’t front-run and buy in advance — at least not more than a few days in advance — as that would expose them to price volatility and risk

• Bitcoin ETFs are approved and they raise a few billion in total before launch.

• Bitcoin ETF issuers then buy Bitcoin on the spot market.

• No matter how much the Bitcoin price has run-up prior to the ETF approval, when the ETFs hit the market to buy Bitcoin it will be fresh demand. That will be further fuel to the fire.

Of course, there are many moving parts and intermediaries like Authorised Participants and market makers who may do the front-running instead of the Bitcoin ETF issuers. Yes, this is possible, but also limited in scale due to the risks they will be exposed to.

That said, the Bitcoin price could go down when the SEC eventually approves the ETFs. Worried? Don’t be.

Here’s what happened to the Gold price when the ETF was approved in 2003.

The gold price ran up hard before an ETF was approved, and then it retraced all of the gains. The ETF was approved near the bottom of the range and coincided with a further, modest price drop.

And then?
A glorious 8 year bull run which delivered +579% gains. 

Do you think it was worth worrying about front-running, priced-in, and sell the news fears?

Yes, it is true that this happened right in the middle of a generationally unique and massive resources boom fuelled by the emergence of China as a global economic super-power. So demand was surging for most precious metals during this period.

History doesn’t repeat, but there are analogs.

Gold had a massive resources boom fuelling demand. Bitcoin has a looming global sovereign debt crisis and diminishing public trust in governments fuelling adoption – in addition to growing legitimacy as a financial asset. A green light from the SEC together with new fair value accounting rules, legitimises Bitcoin as an asset for corporate treasuries.

A Bitcoin ETF will make Bitcoin more accessible to a trillions of dollars managed by investors, and corporate treasuries for companies like Microsoft, Apple, Google, Meta, Amazon which have hundreds of billions in cash.

These investors either can’t, won’t, or do not want to self-custody, for a whole range of reasons. An ETF will be a game changer for Bitcoin by bringing in billions, and eventually trillions, in new money.

Grayscale’s CEO says an ETF will unlock +$30 Trillion in advised wealth in the USA and Top 4 accounting firm Ernst & Young says there is over $200 Trillion of Institutional assets that can't touch Bitcoin until an ETF is approved.

Priced in?
No. Not even a little.

Thank you for reading, and pls share with friends and family.
Cheers,

Archie