Unless you’ve been living under a rock for the past several years, you’ve almost certainly heard of Bitcoin, which is the world’s most widely used cryptocurrency. Bitcoin and other cryptocurrencies using the blockchain allow users to transfer currency peer-to-peer, without the need for intermediaries or a central banking authority.
However, there are several disadvantages to holding Bitcoin outright. For one, the currency is extremely volatile and speculative. Between December 2017 and December 2018, the price of 1 Bitcoin plunged from a high of nearly $20,000 USD to a low well beneath $4,000.
There is also little regulation and oversight in the cryptocurrency market, which makes scams and fraud commonplace. Mt. Gox, once the largest bitcoin exchange in the world, shut its doors unexpectedly in 2014 after discovering that it had lost 750,000 of its customers’ bitcoins in a years long theft.
For these reasons, investors interested in cryptocurrencies – but afraid of the risks involved – are turning to alternative investment vehicles such as the Bitcoin Investment Trust. But how does Bitcoin compare to the Investment Trust?
What is the Bitcoin Investment Trust?
The Bitcoin Investment Trust [OTCMKTS: GBTC] is a trust created by the cryptocurrency investment firm Grayscale that functions similarly to a Bitcoin ETF, allowing investors to speculate on the price of Bitcoin.
GBTC owns roughly 175,000 bitcoins on behalf of its investors. Purchasing 1 share of GBTC currently represents ownership of approximately 0.001 Bitcoin, so you’ll need to purchase 1000 GBTC shares in order to simulate ownership of 1 Bitcoin.
As of 2019, GBTC is the only stock offered on a U.S. public stock exchange that has bitcoin as its primary asset. If you want to use the stock market to invest in other cryptocurrencies, you currently have two options: the Ethereum Investment Trust [ETHE] and the Ethereum Classic Investment Trust [ETCG], which are both owned by Grayscale and deal with the cryptocurrency Ethereum.
How is the Bitcoin Investment Trust Different From Bitcoin?
The Bitcoin Investment Trust [OTCMKTS: GBTC] enables investors to purchase Bitcoins without being responsible for owning them as well.
Owning Bitcoins outright involves several risks. Bitcoins need to be kept in a digital “wallet,” which makes them susceptible to hacking and even loss.
In order to compensate for these issues, GBTC works with the cryptocurrency wallet service Xapo, placing its bitcoins in Xapo’s “cold storage vaults.” This means that the bitcoins are stored offline on a physical medium, preventing hackers from accessing them over the Internet.
Because GBTC assumes these extra responsibilities, the trust charges users a yearly management fee of 2 percent. This fee is fairly expensive when comparing GBTC with other trusts: for example, the gold ETF GLD charges an annual fee of 0.4 percent.
Bitcoin investors need to decide for themselves whether the additional convenience and security of GBTC is worth the pricey annual fee.
Bitcoin Investment Trust vs Bitcoin
In theory, the performance of GBTC and Bitcoin should be nearly equivalent, since bitcoins are the exclusive underlying asset of GBTC. In practice, however, GBTC doesn’t always track the price of Bitcoin closely, thanks to the laws of supply and demand.
On average, when the price of Bitcoin increases or decreases, the price of GBTC shares go in the same direction only two-thirds of the time. Bitcoin Investment Trust stock tends to be more “swingy” than its underlying asset: supply of GBTC shares is increasing slowly and linearly, while demand can rise and fall dramatically depending on the day.
Another problem with GBTC stock is that shares usually trade at a premium above the actual underlying value of the bitcoin assets. For example, on July 1, 2019, shares of the Bitcoin Investment Trust were trading for $12.73, on a day when the price of 0.001 Bitcoin was $10.20. This represents a markup of roughly 25 percent, which isn’t insignificant when considering a valuable asset such as Bitcoin.
Should You Buy Bitcoin Investment Trust?
Considering purchasing Bitcoin or shares of Bitcoin Investment Trust [OTCMKTS: GBTC]?
First, you should know that cryptocurrency investing remains a highly speculative market, even if the price of Bitcoin has been steadily improving over the past few months. The shocking rise and fall of Bitcoin in late 2017, when many investors lost thousands or even hundreds of thousands of dollars, is the most illustrative example of this fact.
While smaller cryptocurrencies might seem like an appealing cheaper alternative to Bitcoin, treat them as you would other cheap investments like penny stocks: a risky venture that has a small chance of big profits – not somewhere to park your retirement fund.
That said, investors who are looking to get the best value for their money should almost certainly purchase Bitcoin directly, rather than putting their money in a fund like the Bitcoin Investment Trust. GBTC adds another layer of uncertainty and complexity to an asset that is already uncertain and complex.
However, the unregulated nature of the cryptocurrency market, and the risks of owning cryptocurrency, may be enough to convince some investors to prefer the safety and convenience of GBTC stock.
The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.