Summary iShares Bitcoin Trust is an institutional bitcoin ETF allowing retail investors to indirectly invest in BTC through any brokerage account. Approval of bitcoin spot ETFs changed how individuals invest in bitcoin, removing operational risks associated with alternative strategies like investing in mining companies. IBIT provides substantial liquidity to investors with $19.7b in AUM with a low bid/ask spread. iShares Bitcoin Trust ( IBIT ) is one of many institutional bitcoin ETFs launched this year after the SEC’s approval of bitcoin ETFs on January 10, 2024 . This event significantly changed how retail investors could access the coin by allowing them to indirectly invest in the cryptocurrency without outright purchasing them through a separate exchange. IBIT, like other ETFs, can be purchased through any brokerage account, whether taxable or tax deferred. From an advisor’s perspective, it would be prudent to allocate upwards of 5% to IBIT as a proxy for BTC; however, looking at BTC from a short-term trader’s perspective, the coin appears to be going through a downcycle. I recommend IBIT with a BUY recommendation for long-term investors seeking to gain exposure to BTC in their retirement accounts. Given the volatility of BTC, I cannot recommend a price target for IBIT. I believe the approval of bitcoin spot ETFs also had major implications to how individuals invest in their bitcoin strategy. Prior to the release, investors either had to open a separate brokerage account with the likes of Binance or FTX, adding additional risks of solvency, or indirectly invest in the cryptocurrency through investments in public companies that mine bitcoin, like Marathon Digital ( MARA ) and CleanSpark ( CLSK ), or invest in firms that outright purchase bitcoin on behalf of their investors through massive debt issuances, such as MicroStrategy ( MSTR ). Each of these alternative strategies poses their own inherent risk. MARA and CLSK must continuously invest in their infrastructure in order to reach profitability, especially post-BTC halving. FinChat FinChat The risk involved adds additional capital and operating costs to generate ~30-50% less revenue. As for MSTR, the biggest risk is the firm’s solvency as the firm cannot support itself through operating cash flow. FinChat IBIT significantly changed the game for retirement accounts and removed the operational risk as found in these indirect BTC plays. For the average investor, this can be significantly beneficial, especially given the amount of assets BlackRock manages. So, for those seeking to invest in BTC and deciding which strategy they should go with, I’d go with the ETFs as it adds direct exposure without any additional operational risks. Though I personally do not invest in BTC, I believe that there is a certain degree of value that can be extracted by holding BTC in one’s portfolio. BTC can be seen as a geopolitical and inflationary hedge. BTC has also been viewed as a hedge against the broader market; however, taking into consideration the volatility index ( VIX ), the S&P 500 ( SPY ), and the NASDAQ ( QQQ ), it is quite clear that the asset class is correlated to downside risk with the NASDAQ index. I believe much of this correlation is driven by the institutionalization of the asset class, in which day-to-day consumers are no longer the only investors buying and selling BTC. I believe that bringing BTC to a more public market through ETFs has added rebalancing risk to the broader theme, making the value of BTC more correlated to the broader market. TradingView This can also be seen when comparing BTC with real interest rates and gold. BTC is mostly negatively correlated to real interest rates, making them somewhat more associated with gold prices in terms of direction. TradingView I believe that these factors debunk the idea that BTC should be valued as an independent asset class. This doesn’t necessarily indicate that BTC is a bad investment; but rather, it should be understood that BTC is likely to be sold off when the broader market sells off, given that it has become institutionalized. FRED So, given these factors, inflationary data and key rates driven by the Federal Reserve should be eyed in order to make long-term decisions on whether or not to invest in BTC. If rates were to decline, BTC may pose a great opportunity to hedge against declining rates. That being said, it has become clear that it is not likely that the Fed will reduce rates given the continuation of elevated inflation. FRED Another benefit IBIT brings to the table is liquidity. The fund has a NAV of $19.7b with a bid/ask spread of 3bps. As of June 18, 2024, the ETF is trading at a 6bps discount to NAV, making this an appealing buying opportunity, assuming the price of BTC prices up. iShares Though I cannot discern on the direction of BTC as this isn’t my trading niche, I can discern on some macro thoughts that may affect the direction of the asset class. I believe that there may be some downside risk to BTC in the near-term as we exit the hype-cycle post-ETF launch. Given the flood of money that flowed into the ETFs upon launch, there may potentially be additional downside risk if investors are seeking to raise cash. The Block I also expect that the Fed will keep rates higher for longer with no cuts in eCY24 as inflation remains sticky above 3%. This may lead to a continuation of higher interest rates and less liquidity to be allocated to BTC. On a technical basis, it appears that BTC may be in a downcycle in anticipation of a rebound in inflation rates. This could pose a challenge to long-term holders of IBIT and BTC. TrendSpider IBIT Recommendation From an advisor’s perspective, it would be prudent to allocate upwards of 5% into IBIT to gain exposure to the asset class, as it may realize inverse returns to real interest rates. From a trader’s perspective, BTC appears to be going through a downcycle and may continue through this cycle if the new set of investors fear realizing losses in the asset class. Given the neutrality of this thesis and the purpose of investing in IBIT as a proxy for BTC, I recommend this product with a BUY recommendation for long-term investors.
