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Jul 27, 2022

Grayscale Bitcoin Trust (GBTC): All You Need to Know

Grayscale® Bitcoin Trust (GBTC), an investment trust that’s traded on the stock market, is a great option for individuals, companies and institutions unfamiliar with the crypto world who want to invest in Bitcoin without directly managing it.

But is it a good investment option for everyone else? Are you missing out if you haven’t invested in it yet? Are there drawbacks that might deter some people from buying Grayscale?

In this article, we’ll answer these questions and more.

What Is Grayscale Bitcoin Trust?

Screenshot of GBTC home page

Source: Grayscale.com

Grayscale Bitcoin Trust (GBTC) is the world's largest Bitcoin fund. It’s also the first-ever publicly traded trust that has a digital currency as its underlying value. If you don’t know what that is, here’s a quick rundown.

Trusts and funds on public stock exchanges have an underlying asset that dictates their value. These assets are mostly stocks in publicly traded companies. The price of the trust or fund fluctuates based on the underlying net asset value (NAV), which is affected by the asset’s demand. An investor can buy a portion of the asset by purchasing shares in the fund.

Since GBTC is a cryptocurrency trust, you can buy its shares through your brokerage account. In doing so, you indirectly buy Bitcoin — avoiding the hassle of purchasing BTC through a crypto exchange. This means that you’re relying on Grayscale to buy and hold Bitcoin for you as a third party.

So the actual BTC is stored in the Grayscale institutional trust, and its retail index is traded on either the open or over-the-counter market. GBTC is similar to a crypto exchange-traded fund (ETF), as it pools investors’ funds to invest in Bitcoin and charges investors a management fee for investing in the fund.

How Does the GBTC Investment Vehicle Compare to a Bitcoin ETF?

Essentially, a Bitcoin ETF, such as the Purpose Bitcoin ETF, is a competitor of GBTC. That’s because ETFs track the market data or value of the underlying asset much more closely than a trust. Hence, the market price per Bitcoin ETF share is relatively close to the actual value of BTC.

But that’s not the case with shares of GTBC, because the trust charges a 2% management fee and sometimes also a premium. That significantly increases the price of a GBTC share as compared to the market price of BTC while spot buying, or while buying shares of a Bitcoin ETF.

However, there are currently only Bitcoin futures ETFs in the market. GBTC is proposing to be approved as a Bitcoin spot ETF, which may be a better product than Bitcoin futures ETFs — as spot Bitcoin ETFs track the market even more closely than Bitcoin futures ETFs.

How Grayscale Bitcoin Trust (GBTC) Works

Grayscale Bitcoin Trust gathers money, usually U.S. dollars (USD), from institutional investors and uses that to buy BTC directly. These BTC are stored in the Grayscale fund, which essentially makes the Grayscale institution — rather than its investors — the actual owners of BTC. You can then buy shares of GBTC and indirectly own BTC.

Ever since Grayscale became a publicly traded fund in 2015, various investors have poured a lot of cash into GBTC by buying Grayscale stocks during bull market cycles. Grayscale has used that capital to buy more and more BTC. Now, it’s accumulated 643,572 bitcoins, which is around $13.5 billion in assets as of the time of this writing (25/7/2022).

The number of BTC owned by GBTC

Source: BuyBitcoinWorldWide.com

To put that number into perspective, Tesla holds approximately 43,000 bitcoins and Ukraine holds about 46,000 BTC.

Top five public companies that are the largest holders of BTC

Source: BuyBitcoinWorldWide.com

What Are Premiums and Discounts on GBTC Shares?

When you buy or sell GBTC shares, the trust doesn’t immediately buy or sell BTC with your investment. That’s where the concepts of premium and discount come into play, which are essential to learn about if you want to understand how GBTC works.

Suppose the Grayscale trust has about 500,000 BTC, which are all bought by shareholders. Then five investors come in, and each buys 1,000 BTC worth of GBTC shares.

Those purchases will raise the overall value of the trust by increasing the number of BTC held by GBTC investors as compared to the number of bitcoins owned by Grayscale as an institution. That’s because GBTC doesn’t immediately use the new investment to buy 5,000 more BTC.

This means that there’s a greater demand for GBTC shares than the supply of BTC. In such a case, the trust will add a premium to BTC’s value. Anyone who wants to buy GBTC shares will then have to pay that premium on top of the share value.

Similarly, if a bunch of investors sell their GBTC shares, the new investors will get a discount. This fluctuation means that you have to buy BTC at a different price than what you’ll get by buying directly from exchanges. That’s why GBTC share prices aren’t the same as the actual value of BTC.

Finally, you can only buy or sell GBTC shares during the opening hours of the stock market, unlike BTC spot buying and selling, which you can do at any time.

Pros and Cons of Grayscale Bitcoin Trust (GBTC)

To help you decide whether or not to invest in the Grayscale Bitcoin Trust, let’s look at its pros and cons.

Pros

Some advantages of buying GBTC stocks over owning Bitcoin directly include:

1. More Security in Cold Storage

Crypto exchanges and wallets are vulnerable to hackers and scams. GTBC charges a management fee for keeping their BTC secure in cold storage, which is safe from hacks.

2. Regular Audits of the Bitcoin Investment Trust

The Grayscale Bitcoin Trust files audited reports with the securities and exchange commission (SEC) to prove that it has the BTC that investors have paid for. That’s an advantage over crypto exchanges, which have the potential to scam people. An example of one such scam is the QuadrigaCX exchange scandal of 2019.

3. Tax Advantages

Investors can get tax breaks when they buy GBTC shares through tax-advantaged accounts, such as a 401(k) or an IRA. It’s also easier for investors to file taxes for publicly traded stocks of a trust that’s approved by the SEC.

Cons

Some drawbacks of owning GBTC stock are as follows:

1. Not Suitable for Smaller Investors

GBTC charges a 2% annual fee. On top of that, you have to pay a premium to buy shares when demand is high. It’s not a good fit for smaller investors, because you need a minimum investment of $50,000 to buy into Grayscale Bitcoin Trust.

2. You Never Actually Own Any BTC

You can never redeem your shares for actual BTC because the Grayscale trust owns the private keys to the BTC in your shares.

3. The Ever-increasing Performance Gap

The value of a GBTC share hasn’t been growing at the same rate as its underlying asset. Even if you don’t have to pay a premium, you still won’t earn as much profit by buying shares as you will by owning Bitcoin directly. From 2020 to 2021, GBTC’s share price increased by approximately 220% in value while BTC surged by nearly 340%.

Is Grayscale Bitcoin Trust a Good Investment?

GBTC isn’t a good investment option because the value of GBTC shares doesn’t accurately match the value of Bitcoin. Also, its shares have been trading at a discount since early March 2021.

Screenshot of GBTC price chart for one year from 2021 to 2022

Source: YCharts

So if you buy GBTC shares today, you’ll get fewer BTC than what you’ll get through spot buying for the same amount of USD.

Investing in GBTC doesn’t give you voting rights on protocols, because you don’t own the private keys to the BTC in your shares. Also, transactions occurring on the trust are censored by government agencies — which defeats the original purpose of a decentralized digital currency.

Perhaps in the future, if the shares start trading at a premium again, then Grayscale will be a good option for accredited investors who can purchase GBTC shares at the NAV price.

Buying GBTC vs. Buying Bitcoin

Volatility is unavoidable whether you’re buying BTC directly or on the open market through GBTC. Whenever lawmakers release new rules about regulating crypto, or deny a crypto ETF request, GBTC’s share prices take a bigger nose dive than Bitcoin’s market price.

Also, since you don’t own the BTC in your GBTC shares, you can’t use it. If you want to actually use Bitcoin and save on management fees, then you’re better off buying BTC directly.

Buying BTC directly as a spot

Source: Bybit.com

Sign up with Bybit now to trade BTC!

Closing Thoughts

Overall, GBTC is a viable option only for a small group of wealthy investors. However, if GBTC gets approved as a Bitcoin spot ETF in the U.S., it may very well turn into a great source of investment, especially as there are currently only Bitcoin futures ETFs. But it still faces hurdles in its journey to becoming a spot Bitcoin ETF. Therefore, while Grayscale remains a cryptocurrency trust, it may be cheaper and safer for retail investors to own Bitcoin directly, despite the current volatility of the crypto market.