There aren’t many indirect ways to own this digital currency when buying Bitcoin, such as mutual funds or ETFs. One hurdle is that investors have limited options to get exposure to digital currency via the stock market. However, an investment vehicle called the Grayscale Bitcoin Trust owns the coin and allows investors to get exposure to Bitcoin through the stock market.
While the trust closely mirrors the performance of Bitcoin, the GBTC stock price tends to over-or undershoot the coin’s performance based on investor sentiment. This article will explore the Grayscale Bitcoin Trust (GBTC) and how that is different from buying the actual coin through Binance or another exchange for informational purposes.
Take note of the following warning:
- As the Securities and Exchange Commission punts decisions on the first bitcoin exchange-traded fund, companies have created cryptocurrency trusts to meet investor demand.
- Bitcoin trusts hold digital currency, allowing investors to trade shares through brokerage or retirement accounts, rather than cryptocurrency exchanges.
- While bitcoin trusts may offer more access to digital currency, these assets may not be suitable for everyone, advisors say.
Some illuminating observations are:
- The Grayscale Bitcoin Trust (GBTC) is a simple way to make a Bitcoin investment through the stock market.
- While GBTC eliminates some hassles and risks of investing in Bitcoin directly, those benefits come at a cost.
- A Bitcoin ETF could render the trust obsolete.
Grayscale Bitcoin Trust
GBTC is the ticker symbol for The Bitcoin Investment Trust, a trust run by Grayscale that holds 638,906,600 shares representing 0.00094950 BTC per share as of January 2021. There were 1,868,700 shares of 0.09242821 Bitcoins as of August 31, 2017, but the stock split; see the update and explanation on Grayscale.
The Grayscale Bitcoin Trust (GBTC) is the world’s largest Bitcoin fund and the first investment vehicle of its kind to report financials regularly to the U.S. Securities and Exchange Commission (SEC). GBTC shares are part of a range of traditional financial products that track cryptocurrency prices offered by Grayscale Investments, the world’s most prominent digital asset management firm and part of the Digital Currency Group (DCG) and CEO Barry Silbert. DCG is also the parent company of Coindesk.
The initial bitcoin holdings were around 63,890 Bitcoins, and people can buy shares of that trust, each representing the ownership of a little under 0.001 BTC. It means if you own 1000 BTC shares, you own a contract that represents just about 1 BTC.
However, this changes over time due to Bitcoin prices and Grayscale adding Bitcoin and other adjustments. The GBTC system is similar to GLD, a gold trust, where a share held by an investor represents about 1/10th a share of an ounce of gold held in storage.
Initially launched in 2013 as the Bitcoin Investment Trust (BIT), GBTC offers accredited investors the opportunity to gain exposure to the leading cryptocurrency by purchasing shares of an open-ended private trust that holds more than 649,130 BTC to date – equating to almost 3.1% of bitcoin’s current circulating supply.
Grayscale is essentially a trust, or it’s a fund that buys Bitcoin, and the shares of this fund are traded on the Stock Exchange. You can go to your broker and buy stocks in this trust, essentially shares in this trust.
What’s different is that you only trade the shares of this trust, and the shares might trade above the value of the BTC owned by this trust. This type of trading is called net asset value trading. You get pretty good exposure to the BTC price movement. However, you cant buy Bitcoin via this medium.
Can you buy Bitcoin from a Bitcoin Trust?
GBTC is not a borrowed Bitcoin platform but a platform that exposes investors to Bitcoin markets to see how it feels, experience the price swings, and the net worth. You can you do all that, but you don’t own the BTC. Just like in Osprey Bitcoin Trust, buying Bitcoin directly from Grayscale is impossible.
If you want to use the BTC, you cannot do it. You essentially would have to sell the shares in this trust, get your money back, and then use your money for whichever you want to do. That’s the main difference. If you have the BTC in your wallet, you can do something with the BTC.
The fund tracks the price of BTC using the XBX index published by TradeBlock – a company recently acquired by CoinDesk. GBTC shares trade at a discount or premium during high BTC market volatility periods, depending on investor demand. For example, when BTC experiences a sharp price increase, there’s a generally higher demand for GBTC shares from institutional investors, which in turn drives their price up.
According to the official website, the minimum buy-in spot price is $50,000, and Grayscale charges a 2.0% annual account fee accrued daily. As of Feb. 5, 2021, the fund’s net asset for each GBTC share is 0.00094825 BTC, approximately $40 when equated to the current spot market.
Investors gain exposure to Bitcoin
Investing in BTC shares allows investors to buy BTC without worrying about storing it, complying with the law, or filing separate taxes. If you buy Bitcoin, you have to manage a laundry list of concerns: How do you store it? Do you need to pay someone to hold custody over your coin?
As a publicly-traded trust, which reports to the US Securities and Exchange Commission (SEC), the Grayscale Bitcoin Trust makes all that hustle that comes with investing in BTC easy to forget.
Investment in a tax-friendly environment
Publicly traded BTC trusts come with various tax advantages. When you buy GBTC, specific IRA, Roth IRA, and other brokerages and investor accounts that won’t give tax breaks on BTC investments, you will give them for investments of publicly traded trusts. Grayscale’s Trust provides those investors with exposure to BTC in a tax-friendly way.
Everyone can invest in crypto
Third, crypto trading is very insular. You can’t trade Bitcoin against stocks in Tesla and Apple (without using crypto stock derivatives platforms). That cuts off the crypto economy from the traditional one. However, as soon as you list Bitcoin on the stock exchange, traditional investors can invest in the crypto economy, albeit in a costly, limited way.
Great investment opportunity
Finally, GBTC is an excellent investment for a casual investor who doesn’t want to trade cryptocurrency on an exchange (but wants to trade Bitcoin). With that said, it can trade at a pretty intense premium due to high demand and limited supply.
The GBTC premium, which is the difference in market price and the value of its holdings, can be very off-putting and paired with the volatility of the Bitcoin market. Still, it can also result in profits beyond what Bitcoin itself offers.
In short, the premium makes GBTC bought at a high premium riskier than Bitcoin itself. However, it’s worth the risk, especially if you get in when the premium is low or when Bitcoin is bullish, as the premium increase means you can at the best of times outpace BTC gains with GBTC.
GBTC vs. Bitcoin ETF
Grayscale’s model has benefitted from the absence of a Bitcoin ETF or exchange-traded fund for a long time. To invest in a Grayscale Bitcoin Trust, you’re buying up shares in a trust; with an ETF, you’re investing in a fund that directly tracks the price of Bitcoin.
A Bitcoin Trust operates differently than a mutual fund or ETF. These trusts periodically sell a limited number of private shares to so-called accredited investors, who meet strict income, net worth, and experience requirements. Later, those accredited investors may sell their shares through public markets. But the prices may not match the underlying asset, known as trading at a discount or premium.
Downsides to Bitcoin Trusts
If someone buys $1 of a Bitcoin trust, his share may have 70 cents of Bitcoin or $1.10 of Bitcoin, depending on the asset’s demand. The explanation is that there’s another layer of supply and demand volatility surrounding it.
The SEC has denied multiple applications for a Bitcoin ETF because Bitcoin’s price can be manipulated. At the same time, US investors wait for a Bitcoin ETF, which may never be approved. Bitcoin trusts are the next best thing.
But in Canada, Three Bitcoin ETFs have launched, offering Bitcoin exposure at a lower cost. The new competition has drawn potential funds away from Grayscale and has even turned the difference between GBTC shares and the underlying Bitcoin per share negative.
In response, Grayscale has announced that it plans to turn the GBTC into a Bitcoin ETF. But for this plan to come to fruition, the US SEC will need to approve a Bitcoin ETF, which it has, so far, been reluctant to do.
In the meantime, Digital Currency Group, which owns Grayscale, has expressed plans to buy more digital assets shares worth over $250 million. DCG said it would use Bitcoin cash on hand and purchase the shares on the open market. By increasing demand in this way, it may partially offset its downward pressure.
Know more about Bitcoin ETFs here.
Who can invest in GBTC?
Anyone can purchase the secondary market GBTC shares using platforms such as Fidelity or Schwab; however, only accredited investors can participate in the daily private placements.
According to the United States Securities Act 1933 Rule 1 Regulation D, an accredited investor is anyone with over $200,000 annual income or a combined spousal income of $300,000 for over two years with the expectation of receiving the same or more during the current year.
In August 2020, the United States Securities and Exchange Commission extended the definition of eligible investors to include individuals with a level of sophistication. Extending the definition of eligible investors mean that people with some degree of expertise can also qualify as accredited investors without earning a six-figure salary.
Although several companies have filed to release the first U.S. Bitcoin ETF, the SEC has continually put off decisions. Along with the need for cryptocurrency regulation, SEC Chairman Gary Gensler is seeking greater investor protections.
Both Grayscale and Osprey have committed to converting their Bitcoin Trusts to ETFs when regulators are ready.
Trading GBTC like Litecoin trust means paying a premium for quick no limited trading. Do you want to be able to trade quickly and easily from your traditional brokerage account at the expense of limited trading hours and a premium? Or do you want way better profit margins with slower trades and transaction fees? Then it would help if you considered Bitcoin trust.
But remain cautious and do not invest your life savings; only invest 1% or less of your total funds. That is sound investment advice and, that might be about right. There is no doubt that GBTC is overpriced in early 2017, but that could change. Still, one can make money on an overpriced asset; no rule says you can’t.
How many trusts are there?
Grayscale Bitcoin Trust (GBTC) and Osprey Bitcoin Trust (OBTC) are the only two Bitcoin trusts available.
Is Bitcoin based on trust?
The financial processes depend on the mutual trust between all parties. The trust offers a greater level of security.
Why do people trust Bitcoin?
Bitcoin is fully open-source and decentralized. No organization or individual can control Bitcoin, and the network remains secure. These are some of the reasons users trust Bitcoin.
Is GBTC an excellent way to invest in Bitcoin?
Although the GBTC stock price does not exactly match the underlying Bitcoin price, GBTC remains the fastest way traditional stock market investors can get into cryptocurrency without actually buying Bitcoin.
What happens if I invest $1000 in Bitcoin?
Excluding transaction costs and other auxiliary fees, $1,000 would have bought approximately 0.00002403 Bitcoins at the current rate. Assuming you hold on to them for the next ten years, it could be valued at over 100,000 USD.