Value investors, like the late Charlie Munger, don’t often think highly of cryptocurrency. They like cash generation. They like businesses they can understand. They dislike speculative nonsense. They are allergic to financial bubbles.
But the essence of value investing is buying a dollar for fifty cents. Buying something for much less than it’s really worth (or its intrinsic value). This discount is what Ben Graham called a “margin of safety.”
The value mindset is arguably the complete opposite of the crypto mindset, which probably helps explain how the NAV discount on GBTC became so severe. Normally, value investors step in to take advantage of the arbitrage between market value and underlying value. Free money sitting on the sidewalk usually doesn’t last that long.
Where were the value investors?
A typical value investor at the time might have taken note of the discount but run the other way because he didn’t want anything to do with Bitcoin. This would have been a huge mistake.
Just as everyone was dumping GBTC, or refusing to buy it, legal efforts were underway by the industry to allow trusts like GBTC to convert into ETFs. Their case was strong, and if successful, it meant the discount to the underlying value of Bitcoin holdings would disappear instantaneously.
But the potential collapse in the discount was only half the appeal. Bitcoin itself would become more valuable if it could eventually be purchased through ETFs, a structure that provides daily liquidity.
Money would pour into Bitcoin ETFs, once they finally got approved. And the price of Bitcoin itself would surge because these ETFs would take all that fresh capital and buy more Bitcoin.
Double discount
In late 2022, GBTC was offering one of the most coveted of all scenarios in the eyes of a value investor: the legendary “double discount.” The underlying assets were undervalued, with an enormous catalyst ahead, and the entity that held the assets was also undervalued.
On December 29, 2022, you could have purchased a share of GBTC for less than $8. Less than 15 months later, on March 13, 2024, GBTC closed at over $65. That is 8-times higher.
To read the full story on the recent surge in GBTC and Bitcoin —in addition to a stock pick idea aligned with the electrification theme, and much more—get immediate online access to Issue #2 of the 76report by starting your subscription right now…
