Bitcoin and the Greater Fool

“It is the peculiar quality of a fool to perceive the faults of others and to forget his own.” – Marcus Tullius Cicero

Would you pay $110 for something that’s only worth $85.73?

What if you owned something worth $85.73 and you could sell it for $110?  Would you hold on to it?

These probably seem like silly/hypothetical questions. The Efficient Market Hypothesis (EMH) states that investors are 100% rational and would never engage in such behavior.

But is that really true? Are investors always rational?

At last Friday’s close, anyone buying the Bitcoin Investment Trust (Ticker: GBTC) was paying $110 for something that was worth only $85.73. You’re reading that correctly. The market price of this vehicle was trading at a 28% premium to its net-asset-value (NAV).

Comparison between Market share and NAV share graph from January 2014 to January 2017

This is far from a one-off, as the trust has consistently traded at a wide premium to its NAV since inception. At one point last June, GBTC was trading at $135 versus a $70.39 NAV, a 92% premium.

If that is not evidence of irrational behavior, I don’t what is.

Why would anyone buy/hold an asset that was trading at such a premium?

3 Words: The Greater Fool

The thinking here is relatively simple: “there will be many other fools who will pay more.”

To these investors, any price whatsoever can be justified under the belief that there is a greater fool out there who will pay an even higher price. Intrinsic value and rational expectations be damned.

Bitcoin is hot right now and has been rising at a rapid pace since the Trust began trading in 2015. Investors want their bitcoins and they don’t care what they have to pay for them. The Bitcoin Trust also promises ease of access and security. From their website:

“The Bitcoin Investment Trust enables investors to gain exposure to the price movement of bitcoin through a traditional investment vehicle, without the challenges of buying, storing, and safekeeping bitcoins.”

You can buy it in your online brokerage account, it’s IRA eligible, publicly quoted, and secured in something called a “deep cold storage vault.” What’s not to like?

There is currently $164 million dollars in this Bitcoin Trust vehicle willing to pay a 2% annual fee for the privilege holding a $110 asset that is only worth $85.73.

All are hoping to sell to a greater fool. None have considered the possibility that the greater fool is them.

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This writing is for informational purposes only. It does not constitute an offer to sell, a solicitation to buy, or a recommendation regarding any securities transaction. It also does not offer to provide advisory or other services by Pension Partners, LLC in any jurisdiction in which such offer, solicitation, purchase or sale would be unlawful under the securities laws of such jurisdiction. The information contained in this writing should not be construed as financial or investment advice on any subject matter. Pension Partners, LLC expressly disclaims all liability in respect to actions taken based on any or all of the information on this writing.



Charlie Bilello is the Director of Research at Pension Partners, LLC, an investment advisor that manages mutual funds and separate accounts. He is the co-author of four award-winning research papers on market anomalies and investing. Mr. Bilello is responsible for strategy development, investment research and communicating the firm’s investment themes and portfolio positioning to clients. Prior to joining Pension Partners, he was the Managing Member of Momentum Global Advisors. He previously held positions as a Credit, Equity and Hedge Fund Analyst at billion dollar alternative investment firms.

Mr. Bilello holds a J.D. and M.B.A. in Finance and Accounting from Fordham University. He has also done a B.A. in Economics from Binghamton University. He is a Chartered Market Technician (CMT) and a Member of the Market Technicians Association. Mr. Bilello also holds the Certified Public Accountant (CPA) certificate.

You can follow Charlie on twitter here.



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