grayscale® bitcoin trust (gbtc), a publicly traded investment trust, is an excellent option for individuals, companies and institutions who are not familiar with the world of cryptocurrencies and want to invest in bitcoin without managing it directly.
but is it a good investment option for everyone else? Are you missing out if you haven’t invested in it yet? are there drawbacks that might deter some people from buying grayscale?
In this article, we’ll answer these questions and more.
what is grayscale bitcoin trust?
the grayscale bitcoin trust (gbtc) is the largest bitcoin fund in the world. It’s also the first publicly traded trust to have a digital currency as its underlying security. If you don’t know what it is, here’s a quick rundown.
Trusts and funds on public stock exchanges have an underlying asset that determines their value. these assets are mostly shares of listed companies. The price of the trust or fund fluctuates based on the underlying net asset value (NAV), which is affected by the demand for the asset. An investor can purchase a portion of the asset by purchasing shares in the fund.
since gbtc is a cryptocurrency trust, you can buy its shares through its brokerage account. By doing so, you buy Bitcoin indirectly, avoiding the hassle of buying BTC through a crypto exchange. this means that you rely on grayscale to buy and hold bitcoins for you as a third party.
therefore, the actual btc is stored in the grayscale institutional trust and its retail index is traded on the open or over-the-counter market. gbtc is similar to a crypto exchange-traded fund (etf) in that it pools investors’ funds to invest in bitcoin and charges investors a management fee to invest in the fund.
how does the gbtc investment vehicle compare to a bitcoin etf?
basically a bitcoin etf, like the bitcoin etf, is a competitor to gbtc. That’s because ETFs track market data or the value of the underlying asset much more closely than a trust. Therefore, the market price per share of Bitcoin ETF is relatively close to the actual value of BTC.
But that’s not the case with gtbc shares, because the trust charges a 2% management fee and sometimes a premium as well. That significantly increases the price of a GBTC share compared to the market price of BTC when buying spot, or buying shares of a Bitcoin ETF.
however, there are currently only bitcoin futures etfs on the market. GBTC is proposing to be approved as a bitcoin spot ETF, which may be a better product than bitcoin futures ETFs, as bitcoin spot ETFs follow the market even more closely than bitcoin futures ETFs.
how grayscale bitcoin trust (gbtc) works
The grayscale bitcoin trust pools money, usually from the us. uu. dollars (usd), from institutional investors and uses them to buy btc directly. These BTCs are stored in the grayscale pool, which essentially makes the grayscale institution, rather than its investors, the actual owners of the BTC. You can then buy GBTC shares and indirectly own BTC.
Since Grayscale became an exchange-traded fund in 2015, a number of investors have poured heavily into GBTC by buying Grayscale shares during bull market cycles. grayscale has used that capital to buy more and more btc. now, he has amassed 643,572 bitcoins, which is around $13.5 billion in assets at the time of writing (7/25/2022).
to put that number in perspective, tesla has about 43,000 bitcoins and ukraine has about 46,000 btc.
what are premiums and discounts on gbtc shares?
When you buy or sell GBTC stock, the Trust does not immediately buy or sell BTC with your investment. That’s where the concepts of premium and discount come into play, which are essential to know if you want to understand how gbtc works.
let’s assume that the grayscale trust has around 500,000 btc, which the shareholders buy in full. Then five investors walk in, each buying GBTC shares worth 1,000 BTC.
Those purchases will increase the overall value of the trust by increasing the amount of BTC held by GBTC investors compared to the amount of Bitcoin held by Grayscale as an institution. that’s because gbtc doesn’t immediately use the new investment to buy 5000 more btc.
this means that there is a higher demand for gbtc shares than the supply of btc. In such a case, the escrow will add a premium to the value of BTC. Anyone who wants to buy GBTC shares will have to pay that premium on top of the value of the share.
Similarly, if a group of investors sells their GBTC shares, the new investors will get a discount. This fluctuation means that you have to buy BTC at a different price than what you will get when buying directly from exchanges. That is why GBTC stock prices are not the same as the real value of BTC.
Finally, you can only buy or sell GBTC shares during stock market open hours, unlike buying and selling BTC spot, which you can do at any time.
pros and cons of grayscale bitcoin trust (gbtc)
To help you decide whether or not to invest in grayscale bitcoin trust, let’s look at its advantages and disadvantages.
some advantages of buying gbtc stock over owning bitcoin outright include:
1. more security in cold rooms
Cryptocurrency exchanges and wallets are vulnerable to hackers and scams. GTBC charges an administration fee to keep your BTC safe in cold storage, which is safe from hackers.
2. periodic audits of the bitcoin investment fund
The Grayscale Bitcoin Trust files audited reports with the Securities and Exchange Commission (SEC) to prove that it holds the BTC that investors have paid for. that is an advantage over crypto exchanges, which have the potential to scam people. an example of one such scam is the quadrigacx exchange scandal of 2019.
3. tax advantages
Investors can get tax breaks when they buy GBTC stock through tax-advantaged accounts, such as a 401(k) or IRA. It’s also easier for investors to file taxes on publicly traded stock held by a SEC-approved trust.
some drawbacks of owning gbtc shares are as follows:
1. not suitable for small investors
gbtc charges an annual fee of 2%. On top of that, you have to pay a premium to buy shares when demand is high. It is not a good option for smaller investors, because a minimum investment of $50,000 is needed to buy a grayscale bitcoin trust.
2. you never actually own any btc
You will never be able to redeem your shares for real btc because the grayscale trust owns the btc private keys in your shares.
3. the widening achievement gap
the value of a gbtc share has not grown at the same rate as its underlying asset. Even if you don’t have to pay a premium, you won’t make as much profit buying shares as if you owned bitcoin outright. From 2020 to 2021, GBTC’s share price increased by approximately 220% in value, while BTC increased by almost 340%.
is grayscale bitcoin trust a good investment?
gbtc is not a good investment option because the value of gbtc shares does not exactly match the value of bitcoin. In addition, its shares have been trading at a discount since the beginning of March 2021.
so if you buy gbtc stock today you will get less btc than you would buying cash for the same dollar amount.
investing in gbtc does not give you voting rights on the protocols, because you do not own the private keys of btc in your shares. Furthermore, the transactions that occur in the trust are censored by government agencies, defeating the original purpose of a decentralized digital currency.
Perhaps in the future, if shares start trading at a premium again, then Grayscale will be a good option for accredited investors who can buy GBTC shares at the browse price.
buy gbtc vs. buy bitcoin
Volatility is inevitable whether you are buying BTC directly or on the open market through GBTC. Every time lawmakers release new rules on crypto regulation, or deny a crypto ETF application, GBTC stock prices plummet more than Bitcoin’s market price.
also, since you don’t own the btc in your gbtc shares, you can’t use it. If you really want to use bitcoin and save on admin fees, you’d better buy btc directly.
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Overall, GBTC is a viable option for only a small group of wealthy investors. However, if GBTC is approved as a bitcoin spot ETF in the US. In the US, it is very likely that it will become a great source of investment, especially since there are currently only bitcoin futures etfs. But it still faces hurdles on its journey to becoming a bitcoin ETF. therefore, while grayscale is still a cryptocurrency trust, it may be cheaper and safer for retail investors to own bitcoin directly, despite the current volatility of the cryptocurrency market.