Trading GBTC: The Bitcoin Investment Trust

Many people want to trade Bitcoin, but don’t want to go through the hassle of setting up a wallet, exchange accounts, and transferring money to make purchases. Most of these people qualify as traditional investors who simply use their traditional stock exchange accounts to trade investment assets.

That’s where the Bitcoin Investment Trust comes into play. Trading under the symbol GBTC, this investment allows investors to speculate on the price of Bitcoin through their brokerage accounts. It’s not a direct way to own Bitcoin, but it’s convenient for investors simply looking for a fund to invest in the cryptocurrency market.

If you’re considering this more traditional avenue for investing in the emerging cryptocurrency market, here’s what you need to know about the Bitcoin Investment Trust.

What is GBTC?

The Bitcoin Investment Trust is basically an exchange-traded fund (ETF) that allows investors to speculate and bet on the price of Bitcoin through their brokerage accounts. GBTC is the trading symbol for the Bitcoin Investment Trust, which is operated by Grayscale Investments.

The fund was modeled after the SPDR Gold Trust ETF (Symbol: GLD), where the fund owns Bitcoin assets on behalf of investors and managers are responsible for the safety of funds. Shares began trading over the counter in May 2015 to increase liquidity. As of now, GBTC is the only way to invest in Bitcoin through your traditional brokerage account.

Grayscale Investments' director of business development spoke about the GBTC offering as a way of investing in cryptocurrencies. During the discussion, Michael Sonnenshein noted, “The structure itself is a trust that passively and fully owns Bitcoin. There’s no leverage, no trading, no cash, no other assets at all other than Bitcoin.”

What are the management fees?

Grayscale charges a relatively hefty fee for participation in the Bitcoin Investment Trust. The annual management fee is 2% of the fund’s assets. This is much higher than GLD’s management fee of 0.40% per year to invest in their physical gold holdings. However, as the only game in town at the moment, and with Bitcoin prices soaring last year, 2% doesn’t seem like an overbearing charge.

As more competitors come to market with regard to Bitcoin and cryptocurrency funds, the associated fees should become more competitive as well. Until then, owning the Bitcoin Investment Trust is definitely a more convenient way to gain exposure to Bitcoin prices than using a crypto exchange, and that convenience comes with a 2% price tag.

Is owning GBTC the same as owning Bitcoin?

This is a tricky question because when you look at the model set by GLD for gold holdings, it’s backed by physical gold that’s stored safely underground. When you buy shares of GBTC, what are you really buying?

Currently, there are 182,680,300 GBTC shares outstanding. Each share represents 0.00100396 Bitcoin. The unique challenge for the Bitcoin Investment Trust is how to securely store and protect their investors’ Bitcoin holdings.

Sonnenshein also touches on this during his discussion, “For GBTC, we have leveraged a third-party custodian, a firm called Xapo. there is super intense cryptographic physical security as well as geographic dispersion such that their security model has no single point of failure.”

Xapo basically serves as the custodian that handles the physical storage and safety of the Bitcoin holdings for GBTC.

How is GBTC valued?

The interesting thing to note about GBTC’s valuation is that it trades at a significant premium to the price of Bitcoin. Using the current price of Bitcoin that’s approximately $7,000, each share is worth ~$7. This is about 30-40% less than the current trading share price for GBTC of $10.75.

It’s important to keep this in mind when considering investing in GBTC. When share prices should consistently match the price of Bitcoin by rising and falling with BTC prices, in reality, the Bitcoin Investment Trust actually moves in the opposite direction of one-third of the time.

The volatility and unpredictable nature of GBTC is attributable to the fund’s popularity and liquidity as the only bitcoin fund available. So the fund tends to outperform bitcoin when investors start buying and underperform the digital currency when investors dump shares. There’s always the chance that you could actually lose money through GBTC while Bitcoin prices are rising.

What’s the news about GBTC’s stock split?

The Bitcoin Investment Trust announced a stock split earlier this year that represents a 91-for-1 split. For investors, this means that if they held one share of GBTC on the day of the stock split, they received an additional 90 shares in their portfolio.

The stock price also reflects the split, being divided by 91 to maintain the same financial metrics for investors. When news was released about the split, GBTC stock prices rose as much as 12% the same day even though Bitcoin’s price movement was considerably less.

The amount of Bitcoin represented by each share of GBTC also reflected the split. That’s where the 0.00100396 Bitcoin per share comes from. Shareholders were not required to take any action. The stock’s symbol stayed the same and additional shares were issued.

The primary purpose of the stock split was probably to make share purchases more accessible for everyday investors. With shares trading close to $2,000 before the split, investors who typically take bite-sized investments up to $1,000 were unable to buy a single share. Now with share prices hovering between $10-20, investors are easily able to accumulate shares that represent their bitcoin holdings.

In effect, a stock split can have a positive impact on share price by boosting liquidity and trading volume. With more shares floating, trade volumes are likely to increase and put upward pressure on share prices.

Should you invest in GBTC?

The Bitcoin Investment Trust presents an interesting investment opportunity for investors who are comfortable trading on their traditional brokerage and exchange accounts. Anyone familiar with trading stocks and ETFs will have no issues buying, selling and trading GBTC.

Whether or not GBTC is the right investment for you entirely depends on your trading abilities, comfortability with different trading platforms, and risk tolerance to cryptocurrency prices. Before investing in GBTC, ask yourself these questions:

• Do you think the price of Bitcoin will increase throughout 2018?
• Do you feel comfortable using a cryptocurrency exchange like Coinbase or Gemini?
• Are you only willing to invest in digital currency through your brokerage account?

If you are comfortable entering the cryptocurrency market and getting set up on a cryptocurrency exchange, that’s where you’ll get the best prices for buying Bitcoin. If you use an exchange like Coinbase or Gemini, you are directly buying Bitcoin at the spot prices. However, this also means you have the responsibility of managing and storing your Bitcoin using a cryptocurrency wallet.

There are plenty of people who don’t want the responsibility and would rather have the simplicity and convenience of buying a publicly traded ETF. There are plenty of people who pay a small premium and management fee to own shares of GLD rather than buying and storing physical gold themselves. The good news for this group of investors is that the large price premium and management fees should come back and more closely mirror that of GLD as the industry matures and more funds enter the playing field.