Fund Flows And Crowd Behavior
A good contrarian investor has to know when to move against the crowd. In this update, we'll look at ETF flows for BTC and Gold, MicroStrategy's valuation, and a crypto trade idea.
My plan is to put all of this capital right back to work on some dips but I don't have a time horizon on when that will be deployed currently. Will do a full post with my thoughts either Wednesday or early Thursday. - Me via Heretic Speculator Chat, Tuesday
Unbelievably, some of that capital started going right back to work just a couple hours later as the crypto market enjoyed another one of its always entertaining flash crashes on Tuesday. That said, I’ve been a net seller of most of my coins this week and still hope to see some lower prices to buy them back cheaper in the weeks ahead. When I say “most of my coins,” I don’t mean most as in aggregate value. I mean most as in I’ve taken small chunks off of just about every individual position.
Buying the carnage can prove challenging not just psychologically but technically as well. As is so often the case, Coinbase COIN 0.00%↑ once again made buying the dip on Tuesday about as difficult as possible and my attempts to grab Litecoin ($LTC-USD) at $75 did not fill. Such is life. Perhaps a reason to just buy and hold rather than be an opportunist.
Despite not getting everything I reached for Tuesday, I do believe there have been some opportunities over the last 48 hours or so and I’ll detail one such trade near the end of this post.
MicroStrategy And Bitcoin ETF Flows
I called MicroStrategy MSTR 0.00%↑ my 2024 top pick for Seeking Alpha near the end of December. The entire thesis was based on MSTR’s Bitcoin treasury strategy. In addition to that BTC strategy, MSTR also had a very large short position, providing a squeeze opportunity if the Bitcoin price did its job:
With over 2.8 million shares sold short, the squeeze potential in this name if Bitcoin continues to rise next year is significant. As I said from the beginning, MicroStrategy as a business is much less exciting than MicroStrategy's approach to treasury management. But because there is an underlying business that is largely uncorrelated to crypto, there is less risk in going long MSTR than there is in other BTC proxies like mining stocks.
Well, BTC has done its job far faster than I expected. At the time of the article, MSTR shares were less than $600. Now they’re closer to $1,300. I’m now out of this trade much earlier than originally anticipated. Mainly because at this valuation, buying MSTR is now significantly overpaying for the BTC the company holds.
Bitcoin is up by about 56% since late December while MSTR is up well over 100%. At the current $21.8 billion equity valuation, MSTR shares are now trading at a significant premium to the $13 billion in BTC that the company holds. And again, this stock is essentially a Bitcoin proxy and nothing more as the company’s actual business activity is now minimal relative to it’s equity value. Short squeeze? I’m not sure now.
Turns out, there are actually now more shares sold short than in December and the company’s shares increased by 17% since the end of Q3-23. Point is, if shares outstanding continue to grow faster than short interest, there is no squeeze and MSTR holders are just overpaying for BTC at these levels. In this case, the spot ETFs make a lot more sense to me and those fund flows are still terrific.
Bitcoin’s spot ETF net flow is now over 175k BTC since mid-January approvals. Those coins are valued at $11.8 billion currently. Without question, the biggest loser has been Grayscale as that firm has seen over 200k BTC come out of its flagship product GBTC 0.00%↑.
Investors are fleeing the fund’s monstrous 1.5% annual fee and going to cheaper alternatives like IBIT 0.00%↑ & FBTC 0.00%↑. You have to wonder how much longer Grayscale is going to let their AUM bleed out while most competitor fees are between 0.2-0.4%. The reason the fees matter so much is because there is nothing meaningfully different between GBTC or these new spot products. All of these funds are single-asset and passively managed. When Grayscale was the only game in town, people were willing to put up with the predatory vig. Those days are over!
Gold Flows Look Sad
Interestingly, another angle that has come out of spot BTC ETFs is the thinking that spot ETF flows are coming at the expense of Gold ETF flows. There might be an element of that happening, but Gold ETF flows have been negative for about two full years.
This is BTC ETF flows more walking with the negative Gold flow parade rather than leading it. The obvious question is what explains this divergence between Gold ETF flow and Gold price? Because like Bitcoin, Gold hit a fresh all time high in dollars this week…
Some thoughts:
Central bank buying the last two years has been enormous and there is likely more of that happening this year as well.
Every seller has a buyer. It’s possible Gold isn’t being “sold” as much as it’s just exiting the traditional system.
It may seem like I waffle on BTC but I can assure you that isn’t the case. There is a difference between liking the idea of something while also being mindful of limitations and the reality on the ground. One thing that I’ve been entirely consistent on over the last 7 or 8 years is that BTC and Gold work great together. As individual investors/savers, we don’t actually have to pick between the two when we can just buy both.
Scared Money Don’t Make Money
Yesterday, I went over my thinking for HSEP and shared some charts in and out of crypto. Summary: it’s looking increasingly clear (again) that everything is the same trade. We’re either long or short dollars and we can express the short thesis through stocks, crypto, commodities, or some allocation to all three. Personally, I bought another chunk of coins this week in a name that remains a highly contrarian idea.
But I’m seeing things in this network that are interesting and I think the native coin of this network could be a real runner if the broader market continues this surge higher - and no, I’m not talking about LTC…
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