Global investment bank and asset management firm Needham & Company recently released a short investment report focusing on the the Grayscale Bitcoin Investment Trust (GBTC). While analyst Spencer Bogart gave GBTC a “Hold” rating, which means the price of the Trust is expected to go sideways over the coming year, the report also included detailed research on the upcoming Winklevoss ETF.
Founded in 1985, Needham & Company LLC is a New York-based investment banking and asset management firm that focuses only on growth companies. An underwriter for 278 IPOs including Google, the firm has led or co-managed 785 public offerings in total, and completed over 385 mergers and acquisitions for a total transaction value of over $200 billion.
The firm also provides private advisory and transaction-related services, Equity research, institutional sales, and trading for their clients. The report, authored by analyst Spencer Bogart, was made for clients subscribed to their ‘Internet/Financial Technology’ investment outlook series.
“Conservatively, we estimate that a bitcoin ETF could attract $300 million in assets in its first week and the resulting effort to source the underlying bitcoin for the Trust would likely drive the price of bitcoin up significantly.” - Spencer Bogart, Needham & Company Analyst
The Winklevoss twins’ long-awaited ETF is pending approval from the Securities Exchange Commission (SEC). After years of delay and amended filings, a decision is scheduled for 11 March 2017, and marks the end of a final extension period.
Bogart analyzed the ETF as he feels that the listing of a bitcoin ETF, “is a low probability event with very significant upside.” Such a large upside, in fact, that it would greatly affect the price of the GBTC, which is based upon the price of one-tenth of a bitcoin plus a premium. The effect, Bogart believes, of any SEC-approved bitcoin ETF would have on the price of bitcoin, ”is vastly underappreciated.”
However, the Bogart estimates the probability of the SEC approving the Winklevoss ETF in 2017 is, “sub-25%.” While there is no specific reason given for the estimate the report states, “the confluence of fear, uncertainty and doubt coupled with basic incentives at the SEC will make it very difficult to get approval.”
“We think it’s a difficult task for the SEC to separate the legitimate probability of something going very wrong from the general fear, uncertainty, and doubt that lurks in bitcoin’s wake,” Bogart states. “We don’t see much upside to approval for the individuals tasked with making this decision.”
The Needham Analyst also explores a third outcome, the SEC simply not responding, which Bogart sees as a positive outcome. If March 11 comes and goes with no response from the SEC, “the proposed rule change is automatically approved,” he explains, “politically, it might be easier for the individuals responsible for making the decision to let the decision go to auto-approval.” That doesn’t mean that the fund itself is approved, the report clarifies, but may improve the chances.
If any bitcoin-backed ETF is approved at any point the effect would, “add legitimacy to bitcoin in the eyes of investors,” the report states, and “would significantly improve perceived regulatory risk.”
“We wouldn’t be suprised to see over $300M of assets flow into such an ETF in the first week,” Bogart states. “Even under normal circumstances this would be difficult to do without significantly affecting price.” The regulatory benefits would be at least as significant in driving price up, the report claims.
“Ultimately, while it appears there is significant pent-up demand from the investment public for such a vehicle, bitcoin itself certainly doesn’t need an ETF and will continue on regardless of the SEC’s decision.” - Spencer Bogart
The Winkelvoss ETF and GBTC aren’t the only bitcoin based investment vehicles. While the Winklevoss ETF is slated for trade on the BATS exchange, the SolidX Bitcoin Trust is designed for trading on the NYSE. The fund only filed with the SEC in 2016, giving the Winklevoss fund a three-year head start on the filing process.
A few other ETFs, both around the world and inside the US, are launching without waiting out the long process of applying for SEC approval. Grayscale’s GBTC was the first to do so, heading straight to an Over-the-Counter exchange called SecondMarket when it launched in 2014. A year later it moved to the OTCQX where it resides today, trading well above the underlying asset value. Unfortunately for the casual investor, GBTC requires full investor accreditation.
There are also several similar funds in Europe, including a fully exchange-traded fund on the Channel Islands Stock Exchange, called the Global Advisors Bitcoin Investment Fund (GABI). The fund opened in 2014, but only received their exchange trading license last month. GABI has returned 56.95% in the last year, compared to 37.42% in the previous year.
GABI’s management company, Daniel Master’s GAJL, also has a couple of separate bitcoin-backed options called Exchange Traded Notes (ETN)/ Bitcoin Tracker One and Bitcoin Tracker EUR were both managed by the Swedish firm XBT Provider, until they were sold to GAJL. None of these products needed SEC approval, as they aren’t being sold to US citizens.
The story of bitcoin ETFs begins and may possibly end with the Winklevoss ETF, if Bogart’s estimation is accurate. In mid-2013 the twins filed for their fund for the first time after scooping up one percent of all bitcoins in existence. Three and a half years, and six filing amendments later, a decision is imminent.
“Shares of COIN are expected to be available for trading on all national security exchanges.” - The Winklevoss COIN ETF website