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There is one common theme that I’ve noticed time and time again over my 30+ years in the market. That is the absolute contempt and arrogance powerful incumbent companies have toward new and disruptive technologies.
Few remember that, at the end of 1999, the CEO of Eastman Kodak – George Fisher – said this: “There are 117 dot-com companies out there who keep saying they’ll eat Kodak and Fuji[Film] up. It amazes me how many smart people believe such stupid statements.”
History shows who was stupid and who was smart as digital photography became the standard and Kodak filed for bankruptcy in 2013.
I’m seeing some of the same contempt and arrogance today toward Bitcoin.
The Masters of the Financial Universe?
In early October, that was clearly on display at the annual Institute of International Finance conference held in Washington D.C.
Larry Fink, the chairman and CEO of Blackrock (NYSE: BLK), said “Bitcoin just shows you how much demand for money laundering there is in the world. . .that’s all it is.” Blackrock is the world’s largest money manager with an incredible $5.7 trillion under management.
Nevermind that a study from the U.K. Treasury said this:
“There are a limited number of case studies upon which any solid conclusions could be drawn that digital currencies are used for money laundering. There are concerns around anonymity, faster payments, and ability to provide cross-border remittances and facilitate international trade. These issues are similar to those identified with many other financial instruments, such as cash.”
The CEO of JPMorgan Chase (NYSE: JPM), Jamie Dimon, used the event to take another of his many swipes at Bitcoin. He said, “But what is the use case for Bitcoin? You’re in Venezuela, North Korea, you’re a criminal. Great product!” You could only imagine the howls of derision for Bitcoin from the fellow “masters of the universe” in the audience.
Dimon has called again and again for governments around the world to squash Bitcoin. Sounds like he and Fink may be a bit scared of being Amazoned by Bitcoin.
The Real World and Bitcoin
Outside the world of Wall Street, Bitcoin seems to be moving steadily toward widespread acceptance.
As usual with innovation, Asia is leading the way. In this case, it’s Japan whose government has put regulations on the Bitcoin trading market. That has only served to broaden the base of Bitcoin traders in Japan where historically its citizens have been willing to experiment a bit in search of returns.
Japan requires companies trading Bitcoin to apply for licenses and subject them to annual audits along with “know-your-customer” requirements. Since the implementation of these rules, trading on Japanese Bitcoin exchanges has soared. Volumes were 6.5 million Bitcoins traded in September, up from just under 500,000 traded in January 2016.
While still not considered legal tender in Japan, Bitcoin is classified as a “payment method.” Consumers there can use Bitcoins in more than 200 outlets across the country and that number is growing rapidly.
My expectation is that other governments around the world will begin to follow the Japanese model, much to the chagrin of Jamie Dimon.
3 Bitcoin Investments
You may wondering if there are ways to gain exposure to Bitcoin without buying them on a digital currency exchange like Coinbase and then storing them on a digital wallet.
Actually, there are a few ways you can play Bitcoin on the stock exchange.
One very conservative way is through an exchange traded fund – the Ark Innovation ETF (NYSE: ARKK). The goal of this fund is to provide investors with exposure to innovation and new technologies across a broad range of sectors.
The ARKK ETF owns a position in the Bitcoin Investment Trust (OTC: GBTC), from a company called Grayscale, and which does own some Bitcoins. However, I do not recommend you buy the Bitcoin Investment Trust directly. Since it is the only publicly-traded investment vehicle that owns Bitcoin, it trades at a huge premium to net asset value. That premium will disappear as Bitcoin ETFs and other instruments become available.
The Bitcoin Investment Trust is the number six position in its current 51 stock portfolio and it makes up only 4.14% of the overall ARKK investment portfolio. In other words, any major selloff (noted short seller Andrew Left is short GBTC) won’t devastate the fund.
Next on the list is a surprising entry – the retailer Overstock.com (Nasdaq: OSTK). Shares of the discount online retailer have more than doubled since the start of August when it began letting shoppers pay with Bitcoin and other major digital currencies.
The shares got a turbo-boost (23%) on September 27, when the company announced plans for an exchange for trading digital currencies. The stock got a similar boost recently after plans for an initial coin offering (ICO) were unveiled. If the ICO is successful, through its tZero subsidiary, Overstock will be the first major public firm to do so. ICOs have raised an astonishing $3 billion this year.
Finally, there is the “picks and shovels” play for cryptocurrency miners. High-powered chips and processors are needed for the computations necessary to mine Bitcoin and other cryptocurrencies. The correlation between Bitcoin and the semiconductor index can be seen in the chart below. The semiconductor industry can be played through an ETF such as the iShares PHLX Semiconductor ETF (Nasdaq: SOXX). The top position in the fund is Nvidia (Nasdaq: NVDA), with all the other major chip firms also in the index.
Despite the protestations of many on Wall Street, it makes sense for a modern portfolio today to have a small exposure (a percent or two) to Bitcoin.
— Tony Daltorio