Expect this stock to jump as much as 50% if Fidelity and BlackRock bitcoin ETFs get approved

Just a week ago BlackRock
BLK,
+0.43%,
the owner of iShares, did the same. BlackRock, which manages $8.6 trillion in assets, is the world’s biggest fund manager. Invesco, with over $1 trillion, along with much smaller niche manager WisdomTree has also filed paperwork for bitcoin ETFs.

If they succeed, we can expect a wave of ETFs tempting mom and pop to wager some of their retirement funds on the fate of the cryptocurrency.

Make of that what you want.

Is this going to happen? Wall Street says: Wait and see. It may all depend on a court case currently before the U.S. Court of Appeals, which is likely to be decided this fall.

But if I wanted to bet some of my retirement funds on the outcome, and I were free to do so, I know how I’d do it. Right now.

I’d buy stock in Grayscale Bitcoin Trust
GBTC,
-1.84%.
It’s a $19 billion trust that owns bitcoin and has been around for a decade. The shares trade over the counter. If the court or the SEC gives the green light to bitcoin ETFs, I’d expect the GBTC stock to jump by 40%, or 50%, pretty fast.

If I owned the stock in an IRA, any gains would be tax-deferred. If I owned it in a Roth IRA, they’d be tax-free, permanently.

Take that, IRS.

(The downside of using a tax shelter is that if I ended up losing money I couldn’t claim the loss).

As a general rule if you make a fast profit on Wall Street — meaning profits on something held for less than a year — you end up paying heftier taxes on your gains than if you make a profit slowly. That’s because such so-called short-term gains are taxed at the same rate as ordinary income, like salaries, while long-term gains are taxed at a lower rate.

Why should GBTC jump by up to 50% if these ETFs get approved? It’s because GBTC is already effectively a bitcoin ETF in waiting. Yet under its current, complex structure, its shares are artificially depressed. By a lot.

On Friday afternoon, for example, GBTC stock was selling for around $18.80 a share.

But the bitcoins owned by the trust, based on the CoinDesk price for bitcoin
BTCUSD,
-0.23%
of $30,300 at the time, were worth about $27.40 per share.

In other words, the trust’s bitcoins are worth nearly 50% more per share than the trust’s actual share price.

This weird anomaly is quite normal for funds with structures like GBTC, which is similar to a closed-end fund. And the managers have no easy way of fixing it, because they are not allowed to buy back shares at the underlying value.

All that changes if the fund is allowed to convert to an ETF.

Managers of ETFs can both issue and redeem shares. If shares are selling for less than the underlying value, they can buy them back at fair value. As a result, the share price of an ETF almost always trades pretty much at the net asset value.

In short, if GBTC were able to convert to an ETF right now, you’d expect its share price to rise from $18.80 to $27.40 even if the bitcoin price didn’t move by a nickel.

Grayscale is the company whose legal case against the SEC is currently being considered by the U.S. Court of Appeals. The company’s argument is that it’s unfair for the SEC to approve funds that invest in bitcoin derivatives, namely futures, but not in bitcoin itself.

One reason big fund companies have refiled their paperwork is so that they can be ready to launch bitcoin ETFs if the court rules against the SEC and gives these funds a green light.

But their interest in turn creates even more pressure on regulators.

What would it mean if the funds are approved? The creation of bitcoin ETFs backed by the most powerful fund companies in America would be likely to attract a lot more interest among ordinary investors. As there is a limited supply of bitcoin around, rising demand should raise prices — which in turn would attract more investors, and so on.

That, at least, is the theory.

If regulators approve the creation of bitcoin ETFs, and if that leads to another boom in the bitcoin price, I’d be looking at a double win on my GBTC stock. I’d get the 40% or 50% immediate gain, as the trust converted to an ETF, and then further gains assuming bitcoin also rose.

Naturally, if this didn’t work out I might get bupkis or less than bupkis. Caveat emptor. None of this is guaranteed. It is a gamble.

I am still waiting for someone — anyone — to explain to me why bitcoin should have any value at all in the long term. What is it for? Why do I want it? And how can it not be replaced by any of the other 26,000 (and counting) cryptocurrencies around?

Personally, I think its ultimate value — someday — will be zero. But I really don’t care. If you disagree, go and buy it and hope.

I’m not free to speculate, and certainly not about anything I am writing about. But if I were going to buy bitcoin, I’d much rather buy it at a big discount. This is a gamble, to be sure, but it’s a tempting one.