Bitcoin entrepreneur Vinny Lingham believes it is too soon for the SEC to approve a bitcoin ETF. In a recent blog, he says that if the SEC approves an ETF soon, another bitcoin bubble could be in the works which will make it harder for the cryptocurrency to stabilize and become a widely-accepted store of value.
He noted that a recent Gizmodo article questioned why bitcoin’s price has hit an all-time high when the writer thought bitcoin would have died by now. The Gizmodo writer is one of many who wonders why bitcoin didn’t die when the market crashed in 2013 after falling from a previous price high of $1.200 to $180. The scenario reminded Lingham of the post-2000 period when many believed the Internet died.
Bitcoin has been recovering for three years following a boom-and-bust cycle caused by Mt. Gox and the media, in addition to negative situations caused by Craig Wright, Mike Hearn and the block size debate.
In an earlier post titled “Finding Equilibrium” in 2014, Lingham took a somber look at factors contributing to the downward and sideways price movement that lasted 18 months.
Lingham now feels the need to warn people about the risks of excessive price appreciation. While bitcoin’s scarcity and value will drive the price over time, excess appreciation could deliver another boom-and-bust cycle, which does not bode well for moving bitcoin from a commodity to a store of value.
Bitcoin has to become boring again for this to occur. A store of value by definition means low volatility. Every boom-and-bust cycle sets bitcoin back many years in this endeavor.
Lingham expects that bitcoin’s price will not break $1,300 until the SEC rules on the bitcoin ETF March 11, unless someone with inside information on ETF approval starts buying bitcoin ahead of the SEC decision.
Lingham wants to warn those who welcome another bitcoin price spike. The $1,300 mark is a psychological price point.
Those who did not believe in bitcoin are starting to believe again, which Lingham sees as a potential danger.
If the SEC approves a bitcoin ETF, such approval is expected to deliver up to $300 million into bitcoin’s ecosystem, which will bring further upward pricing pressure.
Lingham disagrees with those who are saying the ETF is not priced into the current bitcoin price.
Assuming a 10% to 15% chance of the ETF being approved, the current price factors in around $100 to $150 worth of net value. Should the ETF not be approved, Lingham doubts there will be any more than a $150 fall in bitcoin’s price, providing a strong buying opportunity.
If the ETF is approved, a massive bull run will ensue. It will likely indicate the second ETF decision due March 13 will also be approved.
Bitcoin’s price would be at $2,000 or higher now except for the fact that the chances of ETF approval are low.
But should the approval happen, the price will hit $2,000 within days or weeks. The likelihood of a crash below $1,300 would be low.
All of this will trigger more volatility.
Should the price reach $3,000 on account of hype, the bubble becomes a possibility once again. “Smart” money starts to bolt.
Lingham list the following archetypes in bitcoin.
1) Mooners who shout from the rooftops
2) Pump and dumpers
3) Hodlers who buy and forget
4) Speculators and day traders who buy and sell frequently
5) Smart money that buys and sells based on facts
All these archetypes want to see the price spike without concern about its impact on the bitcoin economy or public perception and adoption of bitcoin.
The real problem is the smart money, which has been slowly entering the market. A lot of it has come in the past year at prices below $1,000.
If bitcoin breaks $2,000 and hits $3,000, the smart money will exit, unleashing boom and bust once again.
The ETF presents other challenges if smart money exits the bitcoin ecosystem. ETF holders tend to be high net worth individuals who trade OTC but keep coins off the market, cramping supply and making sure new money and new coins find an equilibrium price point with minimum volatility.
Lingham does not think ETF is in bitcoin’s best interest. His reasons are as follows.
1) The block size debate has not been resolved. Lingham does not view a hard fork as a good thing. An influx of unsophisticated investors could disrupt market value significantly.
2) ETF investors will be subject to market fluctuations depending on who has access to supply and demand data, which could cause price and market manipulation.
3) An ETF will bring unsophisticated investors who will not understand losing 15 to 20% in a day.
4) The bitcoin market cap has not grown organically enough to support $300 million in demand from fickle investors with stop loss triggers. Bitcoin will be most successful being held in small amounts by large numbers of people.
5) Gold and silver, assets that ETFs are being compared to, have experienced big failures. Bitcoin, with a much lower market cap, is all the more prone to market manipulation and the losses could be worse. Bitcoin does not need such risks now.
6) While ETFs open the market to newcomers, the investment is a “vanity metric.” New bitcoin investors would do better to open an account at Coinbase and learn about bitcoin.
7) Lingham favors bitcoin mining companies and hardware manufacturers listing shares on exchanges. The more publicly traded companies in bitcoin, the better. Investors can have access to the ecosystem without worrying about the underlying assets and fluctuations in asset prices.
8) Bitcoin was designed to be a decentralized store of value and currency. ETFs, on the other hand, are from the old world. They create centralized pools. Bitcoin has just moved past the “fake” volumes from China. A new store of tens or hundreds of thousands of coins brings that risk back to the market. Some traders will be able to short sell the ETF.
9) The SEC is supposed to protect the public. It should not work to bring back volatility.
10) Research indicates gold ETFs increased its volatility.
Lingham is not against ETFs, but 2017 is not the right year for them in his view. When bitcoin reaches the $3,000 to $5,000 range and volatility has receded, then it will be time to expose it to retail investors.
Last modified: March 1, 2017 21:25 UTC