With crypto itself generating limitless buzz, it’s hard for crypto investment vehicles to seize headlines.
But the Grayscale Bitcoin Trust (GBTC) has consistently done just that. With an ongoing identity crisis, a discounted price, and investors flooding in as fast as they’re flooding out, the world’s first Bitcoin trust is just as exciting and thrilling as the underlying asset it tracks.
So what is the Grayscale Bitcoin Trust? Why are institutional investors such big fans? What’s going on with that discount, and—more pertinent—should you invest in GBTC?
What Is the Grayscale Bitcoin Trust?
The Grayscale Bitcoin Trust (GBTC) is the world’s largest publicly-traded Bitcoin fund.
Having debuted as the Bitcoin Investment Trust all the way back in 2013, GBTC now boasts over $25 billion in total assets under management and buy-in from over 100 institutional investors.
The purpose of the fund is simple: To allow investors of all types and sizes, from retail traders to old school titans, to invest in Bitcoin without actually having to buy any.
When you scoop up shares of GBTC on TD Ameritrade, Fidelity, or other stock brokers, you’re buying into a literal trust that holds in excess of 650,000 BTC: over 3% of the world’s supply. That being said, demand for GBTC generally oscillates with the value of BTC, so investors in both are on the same roller coaster.
To illustrate, here’s a chart comparing the performance of BTC (light blue) vs GBTC (navy) over time:
Now, you probably noticed that in 2021, GBTC started consistently underperforming BTC.
I’ll address that elephant in the room in a bit. More on the basics first.
What Makes the Grayscale Bitcoin Trust So Special?
The Grayscale Bitcoin Trust’s most appealing characteristic is that it lets you buy crypto without actually buying crypto.
This is a big, honkin’ deal for institutional investors like ARK, Rothschild, and Kingfisher who want exposure to cryptocurrency, but don’t want to deal with:
- Platform hacks and data exposure
- Hot and/or cold wallets
- Regulatory headaches (GBTC is SEC compliant)
- Messy tax reporting
- Confused clients
- Crypto exchanges, who may not have the infrastructure, capacity, or liquidity to facilitate institution-sized trades
Instead, they just scoop up shares of GBTC from a Bloomberg Terminal and they’re done. At that point, they can store, trade, and report it just like every other asset they deal with on the daily.
On that note, Grayscale’s other crypto products deserve a brief mention. If Bitcoin’s not your flavor (or if you’d simply like to diversify) there’s also:
- The Grayscale Ethereum Trust (ETHE)
- The Grayscale Bitcoin Cash Trust (BCHG)
- The Grayscale Ethereum Classic Trust (ETCG)
- The Grayscale Litecoin Trust (LTCN)
- The Grayscale Stellar Lumens Trust (GXLM)
- The Grayscale Horizen Trust (HZEN)
This all sounds pretty neat, but no investment is perfect. So what are the pros and cons to investing in the GBTC yourself? And what’s going on with that weird period of underperformance?
Learn more about BTC ETFs>>How to Invest in a Bitcoin ETF
Advantages of Investing in GBTC
Many of the GBTC’s advantages that appeal to institutional investors should appeal to retail traders as well, such as:
It’s Easy to Buy
You can purchase shares of the GBTC from your regular brokerage account. Here’s how it appears from a J.P. Morgan Self-Directed Investing Account:
No Wallet? No Problem
Crypto wallets, hot and cold, have come a long way. Here are some of our favorites.
Even still, neither is perfect. And the use of private keys in general remains a highly vulnerable single point of failure in securing your crypto investment.
Therefore, buying shares of GBTC allows you to circumvent both. High profile crypto hacks may still affect your investment indirectly, but they won’t wipe it out overnight.
Plays Ball With Regulators
In late 2019, the Grayscale Bitcoin Trust became the first crypto investment vehicle to register with the SEC as a reporting company–lending transparency, liquidity, and therefore investor confidence.
By voluntarily stepping into the regulatory spotlight, Grayscale and its shareholders are less likely to have operations derailed by a nine-figure fine from the SEC.
Easier Tax Guidance and Reporting
Trading Bitcoin under a more traditional asset class makes tax reporting much easier. You won’t have to worry as much about misfiling and drawing the ire of the IRS, who is currently cracking down hard on the crypto community.
Can Be Mixed Into Various Tax-Advantaged Accounts
What’s the best way to HODL for the long-term and reduce your tax liability at the same time? Why, stuffing GBTC into a Roth IRA, of course!
Now, the Department of Labor recently urged workplace 401(k) managers to keep crypto out of employee retirement plans; the SEC issued the same warning to anyone with a self-directed IRA. Both agencies cited concerns with volatility, deregulation, custodial challenges, and more.
All totally valid, if you ask me.
However, if you were already planning to hold crypto with a horizon of 10+ years, sprinkling just a little GBTC into your IRA could lend some exciting exposure to Bitcoin’s long-term trajectory while still addressing many of the SEC’s (fair) concerns.
Disadvantages of Investing in GBTC
Underperformance Is Spooking Investors
Time to address that elephant in the room. GBTC has been underperforming BTC since 2021 and the discount has only grown over time. It reached a high of nearly 30% in early March 2022. Why would this be the case if GBTC's singular purpose is to track the value of Bitcoin?
Some say competition played a role. The Osprey Bitcoin Trust (OBTC), which launched in February 2021, successfully lured investors away with a much lower management fee (0.49% compared to GBTC’s 2%) and continues to be a thorn in Grayscale’s side with over $130 million AUM. Also, the ProShares Bitcoin Strategy ETF (BITO) began trading in October 2021.
Others say it was the expiring lockup period. Accredited investors could buy shares directly from Grayscale at the fund’s net asset value (NAV) then flip them on the secondary market after six months.
However, with Bitcoin’s ongoing downturn, shares that were bought at a 40% premium in 2021 began selling at a steep discount in 2022, spooking away future investors. Grayscale’s solution was to convert GBTC into an ETF, but that’s not a guarantee, since…
The SEC May Reject Grayscale’s ETF Application
Back in October of 2021, the SEC officially approved the first Bitcoin Futures ETF, enabling the ProShares Bitcoin Strategy ETF (BITO) to start trading days later. Spurred on by that victory, Grayscale swiftly filed Form 19b-4 to convert the Grayscale Bitcoin Trust into the world’s first bona fide Bitcoin ETF.
Conversion to an ETF would enable GBTC share values to sync right back up with the funds net asset value (NAV), causing a nice rebound and lending long-term stability. Furthermore, the positive press would likely drive additional investment capital to the fund.
However, BITO and GBTC aren't structured in the same way. BITO primarily invests in Bitcoin futures contracts while GBTC owns Bitcoin directly. So the SEC's approval of BITO's ETF doesn't necessarily guarantee that GBTC will also receive the ETF green light.
So far, the SEC has been mum about GBTC's application. But they recently rejected a similar application from Fidelity, sparking Grayscale to launch a media campaign encouraging us to flood the SEC with supportive comments.
It’s not looking great, however—and the SEC’s rejection may lead to further investor frustration and a continued exodus from the fund.
It Still Tracks a Volatile Investment
Hope is not lost, however. The SEC may very well anoint GBTC as the world’s first true Bitcoin ETF, in which case it’ll track the value of BTC much more precisely.
That could be both a blessing and a curse because at the end of the day GBTC still tracks Bitcoin. And Bitcoin is a highly volatile asset. The Grayscale Bitcoin Trust doesn’t give you a safer or more stable way to invest in Bitcoin—just a more convenient one.
Read more>>Should You Invest in Bitcoin?
Should You Invest in the Grayscale Bitcoin Trust?
Whether or not you should invest in GBTC comes down to your answer to another question:
What’s stopped you from investing in Bitcoin thus far?
- I’m concerned about hacks and theft: With $14 billion in crypto stolen in 2021 alone (a 79% increase from 2020), that’s a valid concern—and GBTC addresses it. Simply put, shares are harder to steal than raw crypto, so investing in GBTC is a safer alternative.
- I’m concerned about risk and volatility: Shares of GBTC are equally volatile (if not more) than the value of BTC since investor confidence in the former seems to fluctuate more strongly. Investing in GBTC is no less risky than investing in the underlying asset it tracks.
- I don’t want to deal with managing a crypto investment (wallets, tax reporting, etc.): If you’d rather not deal with private keys, high trade fees, and funny looks from your financial advisor when you slide your cold wallet across their desk, you might prefer to simply trade crypto like a stock—something GBTC lets you do.
The Bottom Line
In the coming weeks, the Grayscale Bitcoin Trust may very well become the world’s first true Bitcoin ETF, giving crypto a much-needed victory during the 2022 slump and its biggest milestone since the Coinbase IPO.
However, at the end of the day, it’s essentially just a way to buy Bitcoin like a stock. Granted, this lends massive convenience, security, and a sneaky way to slip Bitcoin into your IRA. Plus, buying the “dip” while it’s discounted pre-ETF may lead to short-term gains.
But GBTC will still mirror the volatility of BTC. So if you prefer more stable investments, that's something you'll want to consider before you buy up Bitcoin “shares.”
Further Reading>> Is Bitcoin a Reliable Inflation Hedge?