Spot The Horse

Yesterday after writing my piece about Tesla and Bitcoin, I received an email from one of the smartest guys I know.

“Funny that you wrote about shorting Elon’s science project and GBTC. I just bought both this morning. Thanks for the extra liquidity. Always appreciative of those willing to sell me more on the cheap.”

I had to laugh. We hadn’t talked in a while, and yet here we were on the opposite side of the trade on the exact same day. And to give my pal credit, he was mature enough to not bother calling me an idiot, but instead realized that having someone on the other side of his trade is essential (See you on the Board), so he welcomed my skepticism.

My buddy is a big crypto currency bull. I am talking Ghostbusters-Stay-Puft-Marshmallow-Man size bull. He is so convinced that crypto currencies are headed to the moon, he is involved in creating another bitcoin listed fund. So when he gave me the next tidbit of information, I was smart enough to listen,

“I agree with your short term views on the valuation of both (TSLA and GBTC), but I will let you in on a little secret. There are not a lot of BTC bitcoin funds in the queue, and since we are one of them then I think I speak with a little more insight.”

If my pal is correct, then that is indeed good information. I had assumed there was a huge lineup of Winkelvii type bitcoin ETF’s waiting in the wings, but if I am wrong, then maybe the GBTC premium will persist for longer than I imagined.

And some of my astute readers correctly noted that the borrow fee on the GBTC is quite excessive, so the perceived premium to NAV is not as “capturable” as I made out. Full Circle tweeted that the 80% premium was roughly the annual cost of borrow.

That means that if you were short GBTC, and the NAV was unchanged over the course of one year, even if the premium fell to zero, the borrow would negate your profits. Here is a pro-tip for the Bitcoin bulls out there. If you are long GBTC, then consider enrolling in a program where the borrow earned by the broker is shared with the client. I am not sure how many brokers offer this option, but Interactive Broker has a program called the The Stock Yield Enhancement Program that enables clients to participate in picking up extra yield by allowing their shares to be lent out. Obviously, that carries risk, and you should spend some time understanding the details of the program, but hey, why let the broker earn all that extra juice from the expensive borrow?