Currently, people have two ways to gain exposure to bitcoin - either buy it themselves and store it or buy Bitcoin Trust (OTCQX:GBTC). Between the two, I recommend the first because of GBTC's fees (2%). GBTC does have an important role in showing why a Bitcoin ETF (Pending:COIN) is very important. Currently, GBTC represents 0.09382641 bitcoin. GBTC is also trading around $103 per share. According to GBTC, bitcoin is worth about $1100. Why in the world would investors pay a 42% premium over the spot price?
First, there is demand. To create new shares of GBTC, a person has to be an accredited investor, which means:
An accredited investor, in the context of a natural person, includes anyone who either earned income that exceeded $200,000 (or $300,000 together with a spouse) in each of the prior two years, and reasonably expects the same for the current year, OR, has a net worth over $1 million, either alone or together with a spouse (excluding the value of the person's primary residence).
So most people cannot buy shares directly because of this restriction. Even if someone does, they are not allowed to sell their shares OTC until they hold for one year. So a high fee fund ends up with more demand. The demand is there because investors want to hold bitcoin in their tax-advantaged accounts. A Roth IRA is prime for GBTC or COIN because of the potential for massive capital appreciation. Currently, I cannot store my bitcoins in my Roth, so whatever gains I have, I will pay at a long-term capital gains rate. A bitcoin ETF will allow easier access to more investors without a 42% premium.
The bitcoin ETF has been years in the making. Similar to when SDPR wanted its Gold Trust ETF (NYSEARCA:GLD) approved. Even for gold, it took years for the SEC to approve. Before the gold ETF, an investor could not store it in a tax-advantaged account similar to bitcoin today. GLD started in 2003, and since then drove up the price of gold due to increased demand. That ETF, which is the largest, holds $32B in gold. Compare this to GBTC, which is difficult to buy and holds $140M in bitcoin. A bitcoin ETF will have a similar effect on bitcoin as the gold ETF had on gold.
The approval will likely come in 2017, with the launch of the ETF following shortly after. This announcement will skyrocket the price. Shorts will squeeze out and volatility will follow until a new price is decided. It is difficult to tell with a new asset class where this approval will move the price to. At minimum, it would increase past $1000 a coin. With the approval, GBTC's 42% premium would likely disappear overnight.
While a bitcoin ETF is the next event for a massive price increase, bitcoin has other advantages as well - ability to use as a currency across borders. Transaction volume continues to increase. Fast transactions compared to many traditional methods. Bitcoin also has the ability to change as technology. Bitcoin is also limited at 21 million coins, but divisible down as far as needed. The main advantage gold has over bitcoin is the history of use.
There are risks with bitcoin. A denial of an ETF would have an opposite effect, likely dropping price by 10-15%. Storing bitcoins on 3rd party exchanges leaves risks to theft. I always recommend storing bitcoins on your own computer, holding your private keys. Doing so reduces your risk to nearly 0. This guide teaches various ways to store bitcoin. GBTC is an option if you want the easy way, but you are paying a 42% premium for that ease. Gemini offers a regulated secure way to buy and trade bitcoin. For anyone who wants a favorable high reward with a favorable risk, bitcoin offers just that.
Disclosure: I am/we are long BITCOIN.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.