Crypto Markets Show More Signs of Excess Amid Bitcoin Rebound

LAGOS (Capital Markets in Africa) — In financial markets filled to the brim with froth, one of the more speculative corners is showing signs of bubbling yet again.

Bitcoin rebounded from its sharp sell-off last week which saw prices plunge more than 12%, the steepest weekly drop since last March. The digital asset bounced back from below $30,000 Friday to trade around $34,400 as of 10:22 a.m. Monday in New York.

“It’s a little bit like the tulip mania where people are putting a price on it and the next person puts a higher price on it,” said Jerry Braakman, a chief investment officer of First American Trust, in Santa Ana, California, which manages around $2 billion. “So it has value because people want it. Can that sustain itself? It can until it loses its luster and something else comes along that might be better and all of a sudden you have the flip effect.”

Marathon Patent Group Inc. became the latest public company to snap up coins amid the token’s wild swings this month. The crypto-miner said Monday that it purchased 4,812.66 Bitcoins for an aggregate purchase price of $150 million. The move, the company said, strengthens its position as a “pure-play” investment option for those seeking more exposure to the world’s largest cryptocurrency.

The Las Vegas-based company isn’t the first to add Bitcoins directly to its balance sheet. Michael Saylor, MicroStrategy Inc.’s chief executive officer announced on Twitter Friday that he is plowing another $10 million of the company’s cash in accordance with its Treasury Reserve Policy into the token, bringing MicroStrategy’s holdings to approximately 70,784 Bitcoins.

Saylor invested $425 million of his company’s $500 million cash into Bitcoin last year. The Bitcoin proselytizer then raised an additional $650 million through convertible senior notes to invest in the world’s largest cryptocurrency in December. Marathon Patent raised $250 million through registered direct share offering Jan. 21.

Shares of Marathon Patent rose as much as 6.9% on Monday. Other crypto stock favorites such as Riot Blockchain Inc. and Silvergate Capital Corp. continued to climb.

Crypto-centered companies aren’t the only indicators of froth in the market. Although the premium on the more than $20 billion Grayscale Bitcoin Trust (GBTC) has declined, other funds face soaring markups as retail investors clamor for crypto exposure.

Grayscale’s Litecoin Trust (LTCN) is currently trading at about a 2,275% premium, with its price at $295 a share and a net asset value of $12.42. At the same time, the Bitcoin Cash Trust (BCHG) has a 524% premium. For a return to normal trading, LTCN’s price would have to drop 95.7%, and BCHG would need to plunge 84%, according to Bloomberg Intelligence.

Although much smaller than GBTC — LTCH has $166 million in assets and BCHG has $107 million — the funds have retail’s fingerprints all over them, given that most of the products’ trades are below 100 shares, and many involve just one share.

“Inaccurate pricing in Grayscale’s cryptocurrency trusts is largely driven by retail investors, making them both the cause and victims of the wide divergence with net asset values,” wrote James Seyffart, ETF analyst for Bloomberg Intelligence, in a note Monday.