Why GBTC Is Better Than Bitcoin

Summary

  • Grayscale Bitcoin Investment Trust has indicated that the normal premium over investing directly in Bitcoin is 42%.
  • The current premium of GBTC over Bitcoin is even higher right now at about 85%.
  • Although the premium is very high there are reasons that GBTC might be a logical investment for a set of investors.

I've written three articles about the Grayscale Bitcoin Investment Trust (OTC:GBTC)

As a result, I've been asked several times why anyone would invest in GBTC. In case you didn't know, the average premium over buying Bitcoin directly versus buying GBTC has been about 42%. And the premium right now?

Well, let's do the math:

  1. For every share of GBTC you get 0.09258535 Bitcoin.
  2. One share of GBTC today would cost you $703.50
  3. The market value of 0.09258535 Bitcoin is $380.90 today
  4. Therefore, the premium is about 84-85% above the underlying Bitcoin

Obviously this will fluctuate over time as Bitcoin rises and falls but also because GBTC doesn't perfectly track with the Bitcoin it holds. In fact, that appears to be the insanity.

Why would anyone pay an 85% premium over Bitcoin? You can just buy Bitcoin directly by joining Coinbase (COIN) for example.

Again, you are reading all of this correctly.

You can buy Bitcoin directly if you want to own Bitcoin. There's no requirement that you have to invest in GBTC in order to enjoy the surge in Bitcoin.

As I've already explained, the average premium according Grayscale is 42% but right now it's about 85% over Bitcoin.

Does It Ever Make Sense to Invest in GBTC?

The answer is "Yes!" it can definitely make sense. I will explain that now.

First, I'll give you five quick reasons that Grayscale provides:

  1. Titled, auditable ownership through a traditional investment vehicle - The Bitcoin Investment Trust is a traditional investment vehicle with shares titled in the investors name, providing a familiar structure for financial and tax advisors and easy transferability to beneficiaries under estate laws.
  2. Eligible for tax-advantaged accounts - Shares of the Bitcoin Investment Trust are eligible to be held in certain IRA, Roth IRA, and other brokerage and investor accounts.
  3. Publicly Quoted - Shares of the Bitcoin Investment Trust are eligible to be held in certain IRA, Roth IRA, and other brokerage and investor accounts.
  4. Supported by a network of trusted service providers - Davis Polk & Wardwell LLP serves as legal counsel to the Sponsor of the Bitcoin Investment Trust. Financial statements for the Bitcoin Investment Trust are audited annually by Friedman LLP.
  5. Robust security and storage - The Bitcoin Investment Trust’s assets are stored with Xapo, Inc., as Custodian, in deep cold storage vaults. Bitcoin stored in the Xapo Vaults reside on multisignature addresses, the private keys for which are protected by intense cryptographic, physical and process security.

Boiling all this down the main reason is that investing in GBTC is investing in something that feels familiar. That also means you can buy it easily through the normal channels and you can put it in the normal places. It takes away the fear, uncertainty and doubt of Bitcoin very rapidly. It seems less mysterious, less dirty. And yet? You still get to play the Bitcoin "investing" game.

I am not saying this is bad, or inappropriate, or silly. In fact, quite the opposite. If someone is trying to ride the Bitcoin trend, I can see how it could make sense to go with a low-resistance option. In this case, consider how much easier it would be to talk to your accountant about gains and losses of GBTC vs. Bitcoin. Although I have no interest in GBTC it wouldn't be completely illogical or irrational for some people to invest for this reason.

What About the "Insane Premium" Right Now?

The GBTC premium is rich. The average is over 40% and right now the premium is over 80%. That's not a theoretical premium but instead a very real premium of GBTC over Bitcoin.

Are there other reasons that make sense? One possible answer is that the premium would be washed away over time, much like a growth stock can overcome a high P/E ratio through growth.

Here's how Pascucci said it:

"I've decided to go with GBTC as a way of safely getting exposure to Bitcoin via my brokerage account, because I'm VERY long on it, and I can easily liquidate high dollar amounts (over $10K) at any time I want. And it's all on the up-and-up, easily trackable for tax purposes, which I care about. My thesis is that the current premium is less important to me than the exposure because it's 41% (or whatever the current percentage is) of a small fraction of what the ultimate price of bitcoin will be 10 years from now. It's not perfect, I acknowledge that, but it strikes me as my best option, especially if I'm viewing this as one of my high-risk, high-reward investments."

The argument is that in 10 years, the GBTC premium will be irrelevant. Of course, this leaves out he problem of P/E compression, or the potential catastrophic failure of Bitcoin in general. But, this line of thinking is congruent with the thinking of a Bitcoin bull. This isn't "blind" investing or totally ignorant. I can respect part of this.

I also suggest that you look at these three long comments from Ethereum Girl:

I can summarize by saying that buying Bitcoin directly isn't easy or instant. There is some time and effort, there might be blood, sweat and tears. However, with GBTC it can be very fast. And to emphasize:

"In a matter of a few seconds or minutes you own a Bitcoin derivative, right or wrong. You can hold it in any type of securities account (regular, Roth, IRA) with varying tax implications."

I would like to add that the premium between GBTC and Bitcoin will almost certainly collapse once easier Bitcoin investing is in place. In a word, it will collapse with competition. I don't know by how much, or how far. I have no crystal ball. But, GBTC is really the only game in town. Indeed, as I've said before in a previous article, GBTC is the...

...only publicly-quoted investment vehicle that seeks to provide passive exposure to bitcoin.

Conclusion: On the surface it's insanity due to the enormous premium of GBTC to Bitcoin. However there are real, true, logical reasons to invest. Every investor is different. Every investor has different goals. Every investor has a different risk tolerance and risk profile. Although I have absolutely no plans to invest in GBTC, it might be right for you. If you do invest, just keep your eyes open for the risks discussed above such as GBTC's competition or perhaps the known risk of Bitcoin regulation, Bitcoin collapse, and so on. In other words, if when you see risks with Bitcoin, those risks often apply to GBTC as well.

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This article was written by

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