SMALL CAP IDEA: Argo Blockchain seizes the opportunity as Bitcoin soars

Few would have expected it, but bitcoin is back in business.

The granddaddy of cryptocurrencies looked close to certain death this time last year following a bevy of scandals that shocked the most speculative of asset classes into submission throughout 2022.

But numerous collapsed Ponzi schemes (see Celsius; Terraform Labs) and one high-profile fraud conviction (see FTX founder Sam Bankman-Fried) later, and bitcoin has reemerged as the watercooler asset class of the day.

Bitcoin’s reputation was further bolstered by last week’s landmark approval of spot-bitcoin exchange-traded funds in the US, setting the stage for a tsunami of institutional money into the market.

Bitcoin’s reputation was further bolstered by last week’s landmark approval of spot-bitcoin exchange-traded funds in the US, setting the stage for a tsunami of institutional money into the market

Following the regulatory nod, major assets managers including BlackRock, Grayscale and Cathie Wood’s Ark Invest business pressed the on-switch on the ETFs, thus bringing bitcoin directly onto the US stock market (through an ETF wrapper, anyway) for the first time in history.

Trading volumes across all 11 newly minted bitcoin ETFs neared $5 billion in the first day, and Grayscale’s GBTC fund broke the all-time ETF debut record by clocking $2.3 billion in volumes alone.

Surprisingly for some, bitcoin didn’t see a concurrent rally, though this was mainly due to it already clocking in 170% worth of year-on-year gains prior, leading to a moderate ‘sell-the-news’ situation.

These approvals by the Securities and Exchange Commission (SEC) also came with a warning from chairman Gary Gensler, who remains a permahawk on anything even partially related to crypto assets.

‘While we approved the listing and trading of certain spot bitcoin ETP shares today, we did not approve or endorse bitcoin,’ he stated.

The approvals ‘should in no way signal the Commission’s willingness to approve listing standards for crypto asset securities’, Gensler remarked. ‘Nor does the approval signal anything about the Commission’s views as to the status of other crypto assets under the federal securities laws or about the current state of non-compliance of certain crypto asset market participants with the federal securities laws.’

Why even approve them, you might ask?

Without getting into the weeds of it, the SEC was more or less strongarmed by the US courts, who called Gensler’s decade-long campaign against market-traded bitcoin securities ‘arbitrary and capricious’.

Huzzah for US investors not savvy enough (or risk-tolerant enough) to download a crypto wallet and hold bitcoin for free on the blockchain, but what about UK investors?

Unfortunately – and somewhat ironically given the UK’s supposedly more liberal approach to cryptocurrency than the US – the Financial Conduct Authority maintains a ban on ETFs dealing in ‘unregulated transferable crypto assets’.

As Laith Khalaf, head of investment analysis at AJ Bell, explained: ‘US ETFs are not available for sale in the UK because they don’t issue a Key Investor Document, so fund groups would need to launch funds specifically for the European or UK market.’

The tide may shift as the UK regulators play catch up, leaving few options for UK investors seeking exposure to the bitcoin markets through traditional finance routes.

Few, but not none.

London-listed bitcoin miner Argo Blockchain Technologies presents an intriguing small-cap, bitcoin-adjacent play.

Bitcoin miners use massive server farms of highly specialised computers to keep the bitcoin network ticking along, receiving bitcoin payouts in return.

The more a bitcoin miner contributes to the network, the more bitcoin it receives. This makes bitcoin mining stocks a popular proxy for bitcoin itself.

Indeed, Argo’s share price was up by 170% year on year to 32p earlier this month, reflecting bitcoin’s performance almost to the tee.

Jumping on the opportunity presented by the rally, Argo executed a £7.8 million equity round at a 24% discount on 8 January, after which its shares fell back to 15.5p as of the 15th.

Will Argo shoot up again if, as many suspect, bitcoin has a bullish year in front of it? There’s a good chance it will, though not definitively.

Huge working capital requirements, debt considerations, regulatory uncertainty and even adverse weather conditions all play into Argo’s valuation metrics.

Too tangential for you?

UK investors can tap into a bitcoin ETF listed on the Deutsche Börse thanks to ETC Group’s Physical Bitcoin Fund (BTCE), which the London Stock Exchange just has made available through its Turquoise Europe multilateral trading facility.

For all intents and purposes, this allows UK investors to invest in a physically backed, unleveraged bitcoin ETF despite the lack of domestic regulatory approval.

All for a fee, of course.

Or, you know, you could just go old school and hold bitcoin directly on the blockchain. This requires a sprinkling of technical know-how, but you could save thousands on management fees in the process.