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Do you want exposure to Bitcoin but are not comfortable leaving the traditional financial markets? Fortunately, Grayscale Investments has made this possible with their Bitcoin Trust.
This article will explore the Grayscale Bitcoin Trust (GBTC) and help you determine if it’s the right investment for you.
What is Grayscale Investments?
Grayscale Investments, LLC is the world’s largest digital currency asset manager. As of January 2021, Grayscale has more than $20 billion worth of digital assets under management, with 88% being in Bitcoin.
Grayscale has several crypto products available to institutional and accredited individual investors through private placements, but some are available to trade in brokerage accounts.
These include the Grayscale Bitcoin Trust (GBTC), Grayscale Ethereum Trust (ETHE), and newly launched Grayscale Digital Large Cap Fund (GDLC).
These products offer the benefits of investing in digital assets without purchasing, transferring, and storing digital assets themselves and managing additional individual accounts, wallets, and private keys.
However, these investments come with pricey premiums.
How does Grayscale Bitcoin Trust Work?
GBTC is a trust that holds Bitcoin and allows investors in the equity markets to get exposure to the digital asset. The trust owns bitcoin on its investor’s behalf, with each share of GBTC representing .00094991 bitcoin.
Accredited investors can purchase restricted shares of the Bitcoin Trust directly from Grayscale. After holding shares for one year, the shares purchased become “seasoned” and eligible for sale into the public market.
Any investor on the OTCQX market can buy the seasoned shares, which is the premier Over-the-Counter marketplace.
Owners of GBTC shoulder quite the price premium, typically between 10% to 30% above the net asset value of bitcoin.
However, Grayscale does not charge the premium. The market prices in the premium as it trades in the OTCQX.
A rising premium price indicates that more accredited investors are “buying” Bitcoin via GBTC.
Is GBTC the same as Bitcoin?
GBTC is not the same as Bitcoin. You buy shares of the trust when you buy GBTC, but not the actual cryptocurrency.
GBTC is backed by Bitcoin, and their returns are similar over time, but there will be disparities between them daily. This is caused by several factors: GBTC is limited to normal trading hours, while Bitcoin trades 24/7.
If you’re comfortable navigating the crypto space, buying Bitcoin is a better choice than GBTC because you will actually own the asset and pay less in fees and price premiums. GBTC is an imperfect compromise for individuals who are uncomfortable with cryptocurrencies.
However, GBTC may be useful for Bitcoin bulls because they can benefit from tax-advantaged accounts and “own” the digital currency in their Roth IRA or 401(K).
Learn More: Is Bitcoin a Good Investment?
The Grayscale Bitcoin Trust increased by 290% in 2020, which far outperformed the S&P’s gain of 18.4%. Some believe that Bitcoin is just getting started.
JP Morgan has increased its Bitcoin price target to $146,000 per bitcoin. Since Bitcoin doesn’t have free cash flow or trade on fundamentals, these price targets are predicted by macroeconomic factors.
Bitcoin’s gold framework thesis suggests that it is a superior version of gold and will absorb some of gold’s $9 trillion market cap.
Another bull case describes central banks shifting a small portion of their fiat foreign exchange reserves into Bitcoin.
This kind of institutional adoption will be ideal for GBTC’s future performance.
Is Grayscale Bitcoin Trust an ETF?
GBTC is not actually an exchange traded fund because it is not registered with the SEC under the Investment Company Act of 1940. It does not trade on an exchange.
You can think of GBTC as a closed-end fund instead of an ETF because it typically trades at a premium or discount to its Net Asset Value (NAV). A Bitcoin ETF would track the underlying price of Bitcoin, while a Bitcoin trust does not.
Advantages of GBTC
- We’ve discussed some of the advantages of GBTC, but let’s make sure we didn’t miss any.
- The only way to get exposure to Bitcoin in traditional markets
- Backed by Bitcoin
- Eligible to own in tax-advantaged accounts like IRAs, Roth IRAs, and 401(k)s
- People uncomfortable with the crypto space can safely “buy” Bitcoin
- Available through ordinary brokerage accounts
Disadvantages of GBTC
- We’ve explained some of the limitations with GBTC in this article. Here’s the rest:
- High premiums to own (shares have traded at 2x the value of the underlying asset)
- Annual fee of 2%
- Investors don’t own the Bitcoin they “buy.”
- Low Liquidity
- Future Bitcoin ETFs (if approved by the SEC) would negatively impact GBTC
Grayscale Bitcoin Trust FAQs
Is GBTC a good way to invest in Bitcoin?
GBTC is an imperfect way to get exposure to Bitcoin. You will not own the actual asset, but you will benefit when its price increases. You will pay a premium to own GBTC, typically 10% to 30% higher than the price per bitcoin. Grayscale also charges a 2% annual fee.
Related: Best Blockchain ETFs to Own
How many bitcoins does Grayscale have?
Estimates suggest that Grayscale owns approximately 3.1% of all Bitcoin in circulation.
GBTC vs Bitcoin?
GBTC is a traditional investment vehicle to gain exposure to bitcoin, while Bitcoin is a digital asset. Investors cannot own Bitcoin through traditional markets, so they can purchase shares in a trust to benefit from the rise in bitcoin’s price.
What is Grayscale Bitcoin Trust’s premium?
Grayscale does not charge the premium associated with owning GBTC. The market that GBTC trades in prices the premium, which fluctuates based on institutional interest in directly owning bitcoin versus owning bitcoin via GBTC.
Does Grayscale have an Ethereum Trust?
Grayscale Ethereum Trust (ETHE) gained 390% in 2020 and is available to trade in over-the-counter markets.
ETHE is a way for investors to get exposure to Ethereum in public markets. It is an imperfect way to benefit from Ethereum’s rising popularity.
GBTC Assets Under Management (AUM)
It was created in 2013 and had more than $19.1 billion assets under management. GBTC is a traditional investment vehicle with shares titled in the investor’s name.
This provides a familiar structure for financial and tax advisors, in addition to simple transferability to beneficiaries under estate laws.
GBTC’s bitcoin is stored in cold storage and uses Coinbase as its custodian, regulated under New York Banking Law.
Bottom Line: Grayscale Bitcoin Trust
Some people buy bitcoin instead of GBTC because they are comfortable with technology and can handle the crypto space. Whereas others invest in GBTC to get exposure to the digital future without entering the unknown.
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