Tips for Trading GBTC (the Bitcoin Investment Trust)
Below we explain the Bitcoin Investment Trust (GBTC), the pros and cons of GBTC, and why GBTC is a better investment than bitcoin in someways (but not in others).
What is a trust? A trust (an investment trust) is essentially a company that owns a fixed amount of a given asset (like gold or bitcoin). Investors pool money and buy shares of the trust, owning contracts that represent ownership of the asset held by the trust. In a gold trust, 1 share might be worth 1/10th an ounce of gold. With the Bitcoin trust, 1 share is worth about 1/10th a Bitcoin. The trust is managed by a company who charges a fee, in the case of GBTC that company is Grayscale.
Is GBTC really the only Bitcoin stock? To clarify, GBTC is the only stock offered on the public stock exchange that holds bitcoin as its primary asset. It is also one of the only choices for investing in Bitcoin without buying Bitcoin directly in general here in late 2017 (this could change). In other words, it isn’t the only way to invest in Bitcoin, it is simply the only choice for an investor who wishes to use the stock market to trade cryptocurrency as of November 2017. Learn other ways to invest in cryptocurrencies like Bitcoin.
What is GBTC?
In other words, the trust holds about 170,000 bitcoins and people can buy shares of that trust, each of which represent the ownership of about .092 bitcoins (so if you own 10 shares, you own a contract that represents about 1 bitcoin). This is sort of like GLD is for gold, where each share represents about 1/10th a share of an ounce of gold held in storage.
TIP: Grayscale plans to launch a trust based on Ethereum classic as well. It isn’t public yet, but will work the same way as GBTC.
Is GBTC a Good Buy?
GBTC is, very generally speaking, a great buy for a casual investor who doesn’t want to trade cryptocurrency on an exchange (but wants to trade Bitcoin). With that said, it trades at a pretty intense premium (due to high demand and limited supply).
The premium can be very off-putting, and paired with the volatility of the bitcoin market, makes GBTC bought at a high premium a risky bet. However, there are still some reasons to choose GBTC over bitcoin (especially if you get in when the premium is low, or when bitcoin is bullish).
Consider these reasons to be cautious of GBTC:
- In early September 2017 Bitcoin traded about $4.5k and GBTC $1k. That means GBTC was trading at over 100% premium. In other words, you could have bought 2 bitcoins for every 1 bitcoins worth of GBTC. Meanwhile, later that month GBTC went on to drop below $500 while Bitcoin stayed above $3k (making GBT a much better buy at that point than it had been). So again, you have to not only look at Bitcoin’s market, but at the premium you are paying for GBTC.
- There is an annual 2% fee is paid to the sponsor of the trust. That means value is diminished over time.
- GBTC is the only bitcoin stock on the market. The second there is an alternative GBTC is likely to see their price drop.
- GBTC tends to be more emotional than the already volatile bitcoin. I’ve seen the price change $100 in a day while bitcoin stagnated and I’ve seen major drops while bitcoin stagnated. A stable trust would ideally track the price of bitcoin, GBTC tends to over-exaggerate the price of bitcoin some days and not react at all on other days.
- GBTC only trades while the market is open, the cryptocurrency market however never closes. If cryptocurrency crashes on the weekend, there is no way out until the opening bell on Monday.
Consider these reasons to buy GBTC anyway:
- The cryptocurrency world is a bit like the wild west, you’ll need a digital wallet and you’ll need to upload personal information to an exchange, then you’ll be able to convert USD to cryptocurrency slowly as exchanges limit your spending and slowly draw your money from your bank. Meanwhile, GBTC is immediate and your spending isn’t limited.
- When you trade bitcoin (for other currencies or for USD) you often pay fees. The fees paid can quickly exceed the 2% fee paid to the trust (which is paid from the trust, not per transaction).
- GBTC is the only bitcoin stock on the market. You either get GBTC or you don’t.
- Even with the premium, GBTC has preformed very well at times. Even though it is inconsistent sometimes, if you time it right, it can really pay off.
Now, consider these unknowns:
- On GBTC and Bitcoin Cash (and other forks): GBTC was holding all their Bitcoin when Bitcoin did a hard fork and split into a second asset, Bitcoin Cash. That means GBTC is sitting on “a ton” of Bitcoin Cash (when a cryptocurrency forks like that, all holders of the coin get a proportional amount of the new cryptocurrency along side their existing coin; i.e. they get what some call “free money”). Currently it is unclear how GBTC plans to treat the Bitcoin Cash (and other forks, of which there have been and will be a few). If they distribute only to those who held the stock in August 2017, then GBTC is less attractive to buy now. If they distribute it in some way to anyone holding the stock, then it becomes a much better buy on paper (and some of that premium can be explained away by this). If they don’t distribute the Cash in some way, then it is a worst case in general for holders of the fund. What they do with the Bitcoin Cash is probably the most important factor pertaining to this stock. Recent talk suggest Bitcoin Cash will be benefit to current owners of the fund in some way, but one should assume nothing until we know for sure. Read our updates on how GBTC is handling forks (its still unclear, but we know a bit more now; it appears Bitcoin Cash will be sold and distributed).
- GBTC was the only Bitcoin stock that managed to get onto the market. All the rest have been rejected. Sure “if” another entity can get an ETF out there it will hurt GBTC… but as the Spartans said, “if.”
TIP: See our page on “should I buy GBTC” for more.
TIP: The liquidity and limited supply is what is driving up GBTC’s price. Anyone who claims GBTC should trade at the value of bitcoin (cough; Andrew Left) is not understanding or admitting how big a benefit it is to be able to trade a trust rather than cryptocurrency. A 120% premium is a bit absurd to say the least, but the trust trading at or below the price of bitcoin itself is even more absurd (especially if they do distribute Bitcoin Cash to current owners of the fund in some way). One might assert that a a 20% premium or less would be more reasonable a premium to trade at until other Bitcoin ETFs come out (but of course the market sets the price, not logic). “If” more cryptocurrency-based ETFs come out on the stock market, expect GBTC to trade at or around its “Net Asset Value (NAV).”
OPINION: One could argue that GBTC trades well above its NAV because it is trading based on future value. While this argument has some weight to it, especially considering it is the only Bitcoin stock on the market here in late 2017, the idea that future value justifies the premium isn’t a very compelling argument in my opinion. GLD doesn’t do this with gold to any great extent (generally speaking, if you want to trade the future price of gold, you trade gold futures and options, not a gold trust). In other words, you could argue GBTC’s current price reflects future prices… but that alone in my opinion doesn’t justify the premium. Trading Bitcoin’s value today is risky enough, never-mind trading its future value.
GBTC vs. Buying Bitcoin – The Bottomline
Trading GBTC means paying a premium for quick no limit trading. Meanwhile, trading actual bitcoin means dealing with all sorts of limits and transactions fees.
Do you want to be able to trade quickly and easily? Or do you want way better profit margins with slower trades, transactions fees, a bigger learning curve, and some additional risks?
There is no good answer to what is better. My general suggestion would be to do both (but to remain cautious and not invest your life savings; someone suggested 1% of total funds to invest, that might be about right). There is no doubt that GBTC is overpriced here in early 2017, but that could change. Still, one can make money on an overpriced asset, there is no rule that says you can’t.
Bottomline: The closer GBTC is to the cost of bitcoin (the closer it is to its NAV), the better buy it is. It has historically resisted going below a 20% NAV, so that is worth considering. All that said, even when it is trading at a somewhat absurd premium, there are still real reasons to buy GBTC rather than braving even the simplest and most user-friendly alternative Coinbase. If you understand the risks of GBTC, it can be a worth while bet… but make sure you understand what you are buying. If you are holding $900 GBTC, you are essentially betting Bitcoin will be worth $9k+. That is very possible, but realize the bet you are taking.
TIP: Don’t knock GBTC until you’ve tried dealing with the cryptocurrency exchanges. It is easy to scoff at the premium, but that premium is comes with a ton of benefits for the causal investor looking to take a risk on the volatile Bitcoin market. The average Joe might not have the extra time to deal with the cryptocurrency market (which never closes by the way). GBTC offers exposure to cryptocurrency at premium, and that is a trade-off that some will be willing to make (after-all, market demand is causing the current premium, not Greyscale, so the proof is in the pudding).
- Divergence Between Bitcoin And GBTC: An Arbitrage Opportunity
- Why GBTC Is Better Than Bitcoin
- Grayscale Contemplates Creating Another Entity for Bitcoin Cash