Emerita Capital, a provider of quantitative analysis for investment assets, believes bitcoin price could hit $3,678 if the Securities and Exchange Commission (SEC) approves the Winklevoss ETF on March 11.

The company, writing in Seeking Alpha, recommends portfolios hold between 0.2% and 5.0% in bitcoin. It recommends purchasing bitcoin on an OTC spot exchange.

Emerita Capital states at the outset that its views are contrary to many investment and research firms, a factor that has created an attractive return/risk ratio for investors taking positions in the bitcoin OTC market before March.

It is not the only investment researcher to predict a rush on bitcoin should the SEC approve the Winklevoss ETF. Rob Curran, writing in the The Wall Street Journal, predicted the same thing in a recent article.

Emerita Capital assigns a 35% probability for ETF approval against a 65% probability of rejection, making the final weighted average expected bitcoin price $1645.45, a 67.8% return above the current price.

Bitcoin As A Speculative Vehicle

While the original intention of bitcoin was to become a digital currency payment network, the most successful use is as a speculative vehicle, the company noted. The cryptocurrency is heavily traded for CNY, USD, EUR and 26 national currencies.

From Feb. 24, 2016 to Jan. 22, 2017, the aggregate of bitcoin exchanges had a combined trading volume of 154,713,805.60 BTC, or approximately $141.6 billion at today’s price. Since the end of January, trading volume has declined substantially in China due to new exchange fees after pressure from the Chinese central bank. Nonetheless, the bitcoin price shows robustness and keeps approaching the all-time high of 2013.

Emerita Capital’s main argument for taking positions in bitcoin is based on five pieces of evidence that cover regulation, insider knowledge, market forces, competitive actions and political considerations. The firm believes this evidence has not been described by mainstream investment and research firms.

What Winklevoss Actions Indicate

The firm noted several steps the Winklevosses have publicly taken that indicate progress in conversations with SEC.

On Feb 19, they created Winkdex, an index to track bitcoin prices that is now divulged by major financial information vendors like Bloomberg and Reuters. This could be a pre-requisite for transparency.

Since Jan. 23, 2015, they have run a spot exchange, Gemini.com. It is possible their intention is to source liquidity for their bitcoin ETF through their own spot exchange. This could be a pre-requisite for orderly trading, capital formation and liquidity access.

Through Gemini.com, on Sept. 21, 2016, they formed a daily auction process to settle the bitcoin price once a day. This could be a pre-requisite for fair market price fixation.

On Dec. 8, 2016, they launched a website for investor relationship management and ETF promotion. This could indicate a change of perception in favor of optimism.

On Feb. 8, 2017, they told the SEC that they secured the services of high-frequency trading firms to provide liquidity and efficiency to the ETF.

Another positive indicator is that the Trump Administration is anti-regulation, as demonstrated by the Dodd-Frank Act repeal. There are multiple pro-bitcoin enthusiasts involved in the current administration, including Mick Mulvaney, director of the U.S. Office of Budget nominee, Peter Thiel, PayPal co-founder, Balaji Srinivasan, 21.co-CEO and potential FDA director nominee, Travis Kalanick, Uber CEO and others.

What About Closed End Funds?

The GBTC bitcoin closed-end fund that floats on the OTCQX exchange has been highly successful as an investment vehicle delivering returns in the triple digits. But the closed-end nature of the fund is presenting friction to market participants. GBTC market prices have reached up to two to three times net asset value.

An ETF would be a more efficient underlying asset tracker.

Emerita Capital proposes the case for a massive increase in bitcoin accessibility as an investment asset class if an open-end style fund such as the bitcoin ETF begins trading on a major equity exchange.

Buying pressure on the ETF will drive bitcoin demand. The ETF shares will impact the demand of spot bitcoins through their interchangeability.

What Public Exchanges Will Bring

Bitcoin trading is currently dominated by OTC exchanges operating under no explicit guidelines. A move into public exchanges will:

• Guarantee regulatory oversight for investors

• Increase its visibility as an asset class

• Enhance credibility in the financial scene

• Deliver further consideration of its technical capabilities

Since hedge and endowment funds are sophisticated players inclined to zero beta multi-asset portfolios, they will be the least hesitant to assume positions to attain lower return correlation with equities. Other investors will follow these funds.

Portfolio Recommendation

Emerita Capital recommends between 0.2% and 5.0% of a portfolio to bitcoin, using an OTC spot exchange.

It recommends avoiding the closed-end fund GBTC since it trades at a substantial premium versus net asset value.

The firm’s $3,678 estimated target price, should the SEC approve a bitcoin ETF, is based on the calculations of Needham & Co. of $300 million influx in the first week of trading of the fund in addition to Emerita Capital’s assessment of bitcoin’s top eight spot exchanges’ order book depth.

In case of rejection by the SEC, the estimated bitcoin target price is $551, calculated based on a mean reversion scenario using the weighted average of the last five years of bitcoin prices.

Some have argued the SEC will not want to move forward for a product where most trading is done on Chinese exchanges that do not follow the U.S. AML rules.

Emerita Capital responds that the majority of OTC gold purchase transactions are also happening in China and India. Consumer gold has no AML rules and can be acquired without identification requirements. Such conditions did not present an obstacle for SEC approval of the first gold ETF in 2005.

Also read: Investors ignore analysts, bet on SEC approving bitcoin ETF

A Black Swan

Emerita Capital believes the probability of bitcoin ETF is higher than what the current market consensus implies. The firm considers the event a potential Black Swan with a profound impact in the investment world.

Emerita Capital is not the only investment firm bullish on a bitcoin ETF.

Willy Woo, a bitcoin and investment blogger who is often quoted in cryptocurrency articles, tweeted his estimate of the bitcoin price if an ETF is approved. He noted markets speculate $500 million to $1 billion will be injected if approval probability is 25 percent. Assuming a fundamental $900 bitcoin price, he estimated the price at $3,231 if $2 billion is invested in the ETF, driving bitcoin’s market capitalization from $14.6 billion to $52.4 billion.

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