Why Is The Grayscale Bitcoin Trust Doubling Bitcoin This Year?
The Grayscale Bitcoin Trust (GBTC) is up almost 250% this year – but bitcoin itself is only up half that. Let’s unpack what’s going on here.
What is the Grayscale Bitcoin Trust?
The Grayscale Bitcoin Trust (GBTC) was created by the Grayscale asset management firm in 2013. The trust is essentially a company with one purpose: to hold bitcoin for its shareholders. So when investors buy shares in the trust, they get access to a proportionate amount of bitcoin.
Institutional and retail investors can easily trade GBTC shares on the OTCQX exchange – an “over the counter” (OTC) marketplace in New York. But Grayscale charges them a 2% yearly management fee, and the GBTC stock price doesn’t always match bitcoin’s performance.
GBTC shares typically trade at a premium or discount the the trust’s actual bitcoin value. When there’s a premium, it suggests GBTC is in higher demand – as it’s more expensive to own bitcoin in the trust than holding bitcoin itself. It’s the opposite when there’s a discount: investors would rather pay less to hold bitcoin in the trust. Because the premium keeps changing, GBTC stock can be more volatile than actual bitcoin.
Still, some investors might prefer buying GBTC stock to holding bitcoin itself. Buying shares in a trust is more familiar to them than storing actual bitcoin. It’s also a lot easier for institutional investors to explain to their compliance officers.
Institutional investors can also buy GBTC as private placement shares. These shares typically trade much closer to the actual bitcoin value of the trust.
Why is GBTC up so much more than bitcoin this year?
The chart below compares the performance of GBTC (green) with bitcoin itself (blue). GBTC is clearly miles ahead of bitcoin this year – especially over the past few months.
Here are three potential reasons for the performance gap:
First, investors are speculating that the trust will morph into a Bitcoin ETF. Grayscale is in talks with the US Securities and Exchange Commission (SEC) to turn its trust into an ETF (exchange-traded fund). That would be a much better product for investors. Not only would an ETF have lower management fees, but it would trade much closer to bitcoin’s actual value – with no premium or discount. An ETF would also trade on the Nasdaq exchange like a stock. So it would be better regulated than a trust – and more liquid.
Second, the GBTC discount has been too good to resist. The trust’s discount to its bitcoin value was almost 50% at the start of this year. Bitcoin was at the lows of a bear market back then. And with so many crypto dominoes falling over, there were rumours that Grayscale might also go bankrupt. But as bitcoin bounced back, sentiment around the trust improved. And investors have been buying up GBTC stock ever since.
Third, hedge funds like arbitrage trading. They’ve been shorting bitcoin, buying GBTC, and pocketing the difference.
Should you buy GBTC shares instead of bitcoin?
With the GBTC on such a rampage this year, you might be wondering whether to scoop up some shares. You could still buy GBTC stock at about a 12% discount to its bitcoin holdings right now. If that gap narrows, you might get an extra profit boost when you sell your shares. And if the trust does morph into an ETF, that discount would (in theory) close completely.
But here’s my counter-argument. If a trust, whose only purpose is to hold bitcoin, is up twice as much as bitcoin this year, isn’t it better value to just own bitcoin?
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