Bitcoin and GBTC

Bitcoin has the highest historic returns EVER in ANY market. It even eclipses the gains of AAPL, Google and Microsoft. Where does this price appreciation come from? Also, we see widespread adoption of bitcoin by major financial institutions in multiple forms (ETFs, swaps, futures). Does this mean we should invest in Bitcoin and its derivatives?

Below is a chart and table of GBTC and SPY, the largest bitcoin and S&P 500 ETFs since the inception of GBTC in 2015:

Continuously compounded normalized returns.

Continuously compounded annualized rolling returns as of 12/31/2024.

GBTC = Grayscale Bitcoin Trust ETF (Bitcoin)

SPY = S&P 500 SPDR (Stocks)

SPY barely shows up on the chart. GBTC is the world’s oldest and largest (last I looked) bitcoin ETF. There is a slew of new crypto ETFs. While the above returns are out of this world, so are the risks! And standard deviation 5 times greater than SPY does not capture it. There are enormous one day losses GBTC can experience. Below is a scatter plot of daily price changes for GBTC and SPY.

It may be hard to see but one-day 10% moves up or down are much greater for GBTC than SPY (84 days vs. 5 days). The worst day ever for GBTC was down 49% versus down 11% for SPY.

By definition, since nothing underlies crypto, it is a pure gamble. 

Further, bitcoin and almost ALL crypto exist in a digital anonymous blockchain. Anonymity or “trustless value” is its major calling card and there’s the rub. Bitcoin deliberately has no “know your customer” (KYC). 

KYC is the basis of modern finance and every financial institution including every casino (except bitcoin). KYC is a fundamental tenant of AML or anti-money laundering. With no KYC, bitcoin has unprecedented availability to and demand from money laundering, drug dealing and terrorism. This accounts for its fantastic rise in the marketplace. Many have called for outlawing bitcoin. Unlike legal porn (another source of outrageous return) which is shamed out of commerce, bitcoin has no shame, so far. 

Ok, so if you own it, know WHAT you own!

Note while bitcoin derivatives HAVE KYC, the underlying still doesn’t. The wrappers don’t help. And while there is much work on decoding the blockchain (kind of like decoding DNA) this will be slow to end crypto’s anonymity and source of enormous demand.