- The Grayscale Bitcoin Trust is a financial vehicle that enables investors to trade shares in trusts holding large pools of Bitcoin.
- Shares in the fund track the price of Bitcoin, but only roughly.
- Grayscale also offers several other exchange-traded products, tracking Ethereum, Bitcoin Cash and Litecoin among others.
There’s a way to invest in Bitcoin right on the stock market: the Grayscale Bitcoin Trust. It’s one of several such financial vehicles enabling investors to trade shares in trusts that hold large pools of Bitcoin, with each share priced at near-enough the price of Bitcoin.
As of October 2020, the Grayscale Bitcoin Trust represents $6.5 billion of privately-invested Bitcoin assets. Grayscale, a US crypto investment firm that’s one of the largest purchasers of Bitcoin in the world, launched the trust in September 2013. It trades under “GBTC.”
The Grayscale Bitcoin Trust holds 456,537 Bitcoin, or 58% of the 786,059 Bitcoin held by publicly traded companies, according to Bitcointreasuries.org.
The Trust has generated headlines due to its fast growth. On June 9, 2020, the Trust held 384,953 Bitcoin. That marks an increase of about 70 Bitcoin in four and a half months.
Grayscale also generated its own headlines in 2020 with a massive ad campaign that encouraged investment in the Trust.
How does the Grayscale Bitcoin Trust Work?
The Grayscale Bitcoin Trust works like this:
- 🤑 Grayscale invites a private pool of rich investors to pledge money to the fund, which it uses to buy up huge amounts of Bitcoin.
- 🏛️ Then, Grayscale lists that fund on public stock exchanges, meaning that anyone can trade shares in it.
- 📈 Shares in the fund track the price of Bitcoin, but only roughly.
Shares in the fund can trade at either a premium or a discount to the actual price of Bitcoin. Historically, they’ve almost always traded at a premium. This is good news to Grayscale and its investors, who earn money from that premium, but bad news for investors.
So, why would investors buy shares in the Grayscale Bitcoin Trust instead of just buying Bitcoin outright? There are a couple of reasons:
First, investing in a Bitcoin Trust allows people to gain exposure to Bitcoin without having to worry about how to store it, complying with the law or filing separate taxes.
If you’re buying Bitcoin, you have to manage a laundry list of concerns: How do you store it? Do you need to pay someone to hold custody over your Bitcoin? What happens if you lose the key or your Bitcoin wallet is hacked? As a publicly-traded trust, which reports to the US Securities and Exchange Commission (SEC), the Grayscale Bitcoin Trust makes this easy to forget about.
Second, publicly-traded Bitcoin trusts come with various tax advantages. Certain IRA, Roth IRA and other brokerages and investor accounts that won’t give tax breaks on investments of Bitcoin, will give them for investments of publicly traded trusts. Grayscale’s Trust provides those investors with exposure to Bitcoin in a tax-friendly way.
Third, crypto trading is very insular. You can’t trade Bitcoin against stocks in Tesla and Apple (without using crypto stock-derivatives platforms). That cuts off the crypto economy from the traditional one. However, as soon as you list Bitcoin on the stock exchange—albeit in a very expensive, limited way—traditional investors can invest in the crypto economy.
The Grayscale Bitcoin Trust is one of several publicly-traded trusts, although Grayscale is by far the largest. Rival ETC Group’s Bitcoin product has a market cap of $60 million, as of October 2020, and Wisdom Tree’s Bitcoin product has a market cap of $34.5. In October, when Bitcoin’s price soared, Grayscale performed the worst out of the three, fees notwithstanding.
Grayscale also offers several other exchange-traded products—although its Bitcoin product is by far the largest. Its Ethereum Trust is the next largest, with $928 million worth of Ethereum under management. Others include Bitcoin Cash, Ethereum Classic, Litecoin, Stellar Lumens, XRP, Horizen and ZCash, as well as a digital large cap fund that contains BTC, ETH, XRP, BCH and LTC.
The future success of Grayscale’s trust is far from secure. The shares of its competitors could represent Bitcoin’s price more than Grayscale’s, or they could charge lower fees.
Grayscale Bitcoin Trust vs Bitcoin ETF
In addition, Grayscale’s model benefits from the absence of a Bitcoin ETF, or exchange-traded fund. To invest in a Grayscale Bitcoin Trust, you’re buying up shares in a trust; with an ETF, you’re investing in a fund that directly tracks the price of Bitcoin.
Bitcoin ETFs aren’t legal in the USA right now. The SEC has denied multiple applications for a Bitcoin ETF on the grounds that Bitcoin’s price can be manipulated. While US investors wait for a Bitcoin ETF—one that the SEC may never approve—Bitcoin trusts are the next best thing.
The views and opinions expressed by the author are for informational purposes only and do not constitute financial, investment, or other advice.