A couple of days ago I got quoted in an article about a strange phenomena in the Bitcoin world. An exchange traded trust that was supposed to track the price of bitcoin (all the trust contains is bitcoin) was trading at a very high premium to the underlying bitcoin.
Bitcoin is relatively difficult to buy and sell. It has a niche appeal and the pool of money available to buy and sell it is much much smaller than what is available to trade a publicly traded security like the Bitcoin Trust. This is how the price dislocations can happen so easily. This happens in more popular areas of traded securities as well, such as in close ended funds which can trade away from their Net Asset Value.
The issue is that these do not have a readily available mechanism for bringing their price back to the value of underlying investments. More modern securities like ETFs, however, do have a mechanism to bring their price back to the value and trade very close to NAV.
“Lack of liquidity, accessibility and transparency can all cause significant price dislocations. With the BTC Trust, it is far easier for people to access the trust than the underlying Bitcoin. With the pool of available money going into the trust faster than into Bitcoin, that price rises far off of its underlying value,” he told Finance Magnates.
As to why the premium is maintained even when considering the equally relative ease with which the shares can be sold off, this too is a matter of supply and demand. “The supply of money ready to go into exchange traded investments, like the trust, is just much much greater than the supply of money ready to go into bitcoin, which, for all of the attention it gets, is still a very niche thing,“ he argued.
Bitcoin is a weird place right now, and the slow creep out of the shadows will certainly have some rough patches like this. While I have no strong views on what to do with bitcoin or where it is going, it sure is interesting to watch!
