The Grayscale Bitcoin Trust (OTC: GBTC) is a closed-end fund (CEF) passively invested in Bitcoin, offering investors exposure to the cryptocurrency in the form of a security. Bitcoin is the fund’s only asset and thus GBTC’s price should, in theory, mirror the value of bitcoins held in the fund.
While GBTC issues new shares periodically similar to other CEFs, at present there is no option to redeem shares.
Recently investors have become increasingly bullish about Bitcoin’s prospects, pushing it to near all-time highs. While investors can buy bitcoin directly on a crypto exchange, many investors find it easier to trade bitcoin via the stock market, fueling excess relative demand for GBTC, causing its price to exceed NAV by approximately 30%. On Friday, December 4 for example, GBTC closed at $23.2, yet the underlying value of each share was only $17.8.
We believe the GBTC premium is due to reverse and that investors looking for bitcoin exposure should look elsewhere.
Premiums Can Quickly Become Discounts
Just as investor exuberance can cause a CEF to trade at a premium to NAV, if sentiment on the underlying reverses, prices can quickly swing to a discount.
Fund managers understand variance to NAV is unappealing, especially to large investors who place a high value on liquidity. To address this issue, CEF managers typically offer a redemption feature in which investors can automatically receive an amount typically in the range of 95% - 100% of the per-share NAV. Funds may offer redemptions on a continuous or periodic basis.
Some investors might think of the current 30% GBTC premium as the cost of gaining easy exposure to a “commodity” with initiated custody. While that may currently be the case, a range of new products (examples follow below), both liquid and transparent, and a well-regulated futures market with the CME, all offer bitcoin exposure with similar convenience
