I want to tackle a question from the Ask Kim mailbag about GBTC vs. Bitcoin, which is of interest to investors because GBTC is the one way we can invest in Bitcoin directly via the stock market.
But should we? … David asks:
“Nearing end of Cryptoassets (thanks for recommendation, everyone needs to read) and they mention GBTC. Don’t recall a podcast mention as yet. Too much of a premium to consider? Easy to get via the brokerage account. Any period chart tracks my 4 cryptoassets portfolio which tells me premium has been relatively constant.” — David
I am going to tackle this question in four parts:
1. What is GBTC for those who are not familiar with it
2. The pros of GBTC
3. The cons of GBTC
4. Whether I think GBTC is a decent alternative to just owning Bitcoin itself
So what is GBTC?
GBTC is the ticker symbol for the Greyscale Bitcoin Investment Trust.
An investment trust is a company that owns a fixed amount of a given asset, in this case Bitcoin. Investors buy shares of the trust, which is really a contract that represents ownership of the asset held by the trust.
In a gold trust, for example, 1 share might be worth 1/10th an ounce of gold. With the Bitcoin trust, 1 share of GBTC is worth roughly 1/1000th of a Bitcoin.
As of March 31st, just to give you an idea, the trust held about 182,000 bitcoins, and there were about 182 million shares of that trust outstanding, each representing ownership of about 0.001 Bitcoins.
The trust is managed by a company, who charges a fee. And in the case of GBTC that company is Grayscale.
Initially, all of Greyscale’s investment trusts — they have others for other cryptoassets — were sold only to individual accredited investors with very large minimum purchases and long lockup periods.
Then, after a period of time, they listed the shares of the Bitcoin Investment Trust on the over-the-counter market, known as a secondary market.
This allows initial investors to sell their shares on the open market and individual investors, even non-accredited investors, could buy them, at a market price, very similar to buying a stock, where the price can float up and down based on supply and demand.
So again, just to give you an example, today you can call up your stock broker or go online to your brokerage account and buy a share of GBTC for about $14 dollars US.
GBTC is, for the moment, the only game in town in terms of direct investment in Bitcoin through a traditional stock trading account.
The pros of GBTC vs. Bitcoin …
The biggest pro is, as we have already discussed you can buy and sell GBTC through your existing brokerage account, without having to set up anything new or transfer money.
Assuming your brokerage firm supports the over-the-counter market, you can have the trade done in a matter of minutes. So it’s very familiar and convenient.
But more importantly, GBTC can also be bought and sold in your IRA at a traditional brokerage firm.
To buy Bitcoin directly in an IRA requires opening what is known as Bitcoin IRA with a special custodian, with huge minimums and outrageous fees. And I don’t recommend it. For now.
But the biggest advantage of GBTC is it is an easy way to get direct exposure to Bitcoin, even in very small quantities, in your regular old retirement account.
The other major selling point of GBTC is that you don’t have to worry about securing the Bitcoin. Part of the fee you pay to Greyscale is for making sure all that Bitcoin is secure.
For you, it is just a number that appears next to a ticker symbol on your brokerage account list of positions, just like your stock and ETF positions. There is no need to secure it in a wallet. No risk of getting hacked or losing it.
But before you rush out and start buying GBTC, there are some definite disadvantages as well. Big ones
Let’s start with fees. There is a 2% annual fee on GBTC that you don’t incur when you own Bitcoin directly. That’s a lot when you consider the fee on the GLD Gold ETF, a commodity asset that also has to be physically managed, is only .4%.
But, if that was all you paid, it probably wouldn’t be that big of a deal. The real issue is the premium.
Remember when I told you that today you could buy a share of GBTC for about $14? Well, today, that $14 share only owns about $8 worth of Bitcoin. The difference is the premium you pay for owning GBTC instead of Bitcoin directly.
On the average day, shares of the trust close at a price 42% higher than the underlying value of their bitcoin. That’s roughly where it is today. This premium was as high as 132.6% in May 2017, and as low as -0.1% in October 2015.
What this means is, if instead of buying Bitcoin Investment Trust you used the same amount of cash to buy bitcoin on a cryptocurrency exchange like GDAX or Gemini, you’d get 42% more bitcoin for your money, on average, and your investment would follow bitcoin’s price perfectly.
You see, unlike ETFs you may be used to, which almost perfectly mimic the price of Gold or the S&P500, GBTC does not mimic the price of Bitcoin. Not even close.
In fact, on roughly one out of three trading days, bitcoin and GBTC actually moved in opposite directions. In fact, looking at the three month period just ended, the price of GBTC’ Bitcoin holdings went up 6.55% on the open market but the market price of GBTC itself, went DOWN 1.67%!
How can this happen, you might ask, when the only asset is Bitcoin? Why wouldn’t it just mimic the price of the underlying, as it is intended?
The answer is supply and demand. The supply of GBTC shares is relatively constant. But the demand for those shares swings wildly.
In an article titled Why Bitcoin Investment Trust is a Bad Investment, the author says, “It’s safe to say that Bitcoin Investment Trust is likely to outperform bitcoin when investors pile in, and underperform bitcoin when investors flee from its shares. It tends to overshoot both up and down, rising more than bitcoin when the digital currency soars in value, and falling faster than bitcoin when it declines in value.”
As if overpaying isn’t bad enough, I believe that premium will eventually evaporate as soon as there is more competition meaning you could be risking a pretty steep haircut unrelated to the underlying fundamentals.
So with all that said, do I think GBTC is a viable alternative to Bitcoin?
Viable yes. Preferable no!
I do own GBTC in my IRA, because for my husband and I, that is where the vast majority of our investment money is. But I definitely prefer, for now, to own crypto assets directly, when I can, because of the premium. 42%, on average, is pretty big hill to climb.
And frankly, if this was a traditional investment with traditional upside potential, I wouldn’t even consider it. That would be lunacy!
But because this is Pascal’s Wager, where we are making a bet on a huge upside… if we are right, a 42% premium will be a rounding error. And I definitely won’t mind having all those gains in my IRA, where they are tax-free.
If we are wrong, we were going to invest the same 2% of investable assets anyway. So whether I lost it on Bitcoin only or Bitcoin plus premium, won’t really matter either.
I guess on the one hand, I pay a 42% premium, on average. On the other, I would pay capital gains taxes.
So, I still think the advantage goes to owning Bitcoin directly. At least for now.
As with all things crypto, this may change, as the asset class evolves, competition heats up, and that premium pulls in, then it may make perfect sense.
Something to consider. I hope you found it helpful …
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