Bitcoin’s golden moment: BIT gets FINRA approval

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Online wallet and exchange services such as Coinbase have made it incredibly easy for the everyday investor and user of bitcoin to buy the currency. But what if you want to buy and hold bitcoin as an investment? Or, what if you want to diversify your investment portfolio into this new asset class, but do not have the expertise or resources to securely procure and store bitcoin?

One solution to this problem has been the Bitcoin Investment Trust (BIT), which holds bitcoin in a trust in which investors can then buy shares. The BIT has been a private vehicle open to accredited investors since 2013, but that is about to change.

On March 1, 2015, Grayscale Investments (the sponsor of the BIT) announced that it has received regulatory approval from FINRA for the fund to trade publicly on an electronic platform operated by the OTC Markets Group.

This announcement ensures that the BIT will be the first publicly traded bitcoin investment fund and could pave the way for more stability in the price of bitcoin. It is also possible that a publicly traded fund like the BIT could have the same effect on the price of bitcoin as the SPDR Gold ETF had on the spot price of gold.

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When GLD began to trade, the spot price of gold was trading just above $400 per ounce. Prior to launch of the GLD, in order to purchase and store gold, investors needed to call a broker who specialized in buying spot gold and then arrange for storage. This meant opening new accounts and paying for vault space.

Alternatively, many investors opted for the simple solution of buying gold coins and storing them in a safe deposit box. However, this method was not very efficient and as a result investing in gold was difficult for the average investor.

Once investors had an ETF option, the diversification into gold began in earnest. Propelled by ease of investment and a well-timed financial crisis, the price of gold more than quadrupled to over $1900 in 2011.

I have previously written about the inverse relationship between the price of bitcoin and merchant acceptance. There has been a flawed assumption that merchant acceptance will push the price of bitcoin ever higher. However, the evidence suggests differently. In fact, it appears that increased merchant acceptance has been a drag on the bitcoin price. The following chart illustrates that as bitcoin transactions increase the price declines.

The best explanation for this phenomenon is that as merchants receive bitcoin they immediately convert to fiat currencies. This selling pressure could be a big driver of the downward slope in price despite corporations like Dell and Microsoft accepting the digital currency. However, the public listing of the BIT could change this relationship.

There is really nothing mysterious about financial markets, they simple represent a place where buyer and seller agree on price, but disagree on value. If the seller values fiat currency more than bitcoin (perhaps to pay employee salaries in US Dollars) then they are more likely to accept a lower price.

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On the other side of the bitcoin transaction is the buyer which currently consists of long term investors. A falling price suggests that the sellers either outnumber the buyers or are more aggressive in terms of price.

Presently there is very little competition between buyers, but an easy on-ramp to investing could change that dynamic. As long term investors enter the space the BIT may provide the needed competition for a scarce resource that will push the price higher. This is exactly what occurred when GLD was launched.

Competition for a scarce resource is not a development unique to digital currency - this is the way markets have operated for thousands of years.