By Robert Stevens and Tim Copeland
6 min read
There’s a way to invest in Bitcoin right on the stock market: the Grayscale Bitcoin Trust (GBTC). 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 April 2021, the Grayscale Bitcoin Trust represents $37.2 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 654,885 Bitcoin, or 46% of the 1.4 million Bitcoin held by publicly traded companies, according to Bitcointreasuries.org. As of April 8, 2021, GBTC currently trades at $47.57, and per official documents, holds 0.00095 Bitcoin (worth $54.6) per share.
The Grayscale Bitcoin Trust works like this:
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 GBTC 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 $1.2 billion, as of April 2021, and Wisdom Tree’s Bitcoin product has a market cap of $329.6 million.
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 $6.4 billion worth of Ethereum under management. Others include Bitcoin Cash, Ethereum Classic, Litecoin, Stellar Lumens, Horizen and ZCash, as well as a digital large-cap fund that contains BTC, ETH, LINK, 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.
For a long time, Grayscale’s model has benefitted 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.
But over in Canada, things are a bit different. Three Bitcoin ETFs have launched, offering Bitcoin exposure at a lower cost. In particular, the Purpose Bitcoin ETF has already sucked in 14,660 Bitcoin, worth $847 million. This new competition has drawn potential funds away from Grayscale, and has even turned its premium—the difference between the price of GBTC shares and the underlying Bitcoin per share—negative.
In response, Grayscale has announced that it plans to turn the GBTC into a Bitcoin ETF. In April, the firm said it is, "100% committed to converting GBTC into an ETF." It has also hired ETF specialists. But for this plan to come to fruition, the US SEC will need to approve a Bitcoin ETF—which it has, so far, been reluctant to do.
In the meantime, Digital Currency Group—which owns Grayscale—has expressed plans to buy up to $250 million worth of shares in the GBTC. DCG said it would use cash on hand and purchase the shares on the open market. By increasing demand in this way, it may partially offset the negative premium.
While the GBTC is Grayscale's biggest trust, it has a few alternatives on offer and has been expanding its line-up in 2021. The firm's other trusts include well-known cryptocurrencies such as Ethereum, Litecoin and Bitcoin Cash.
In February, the firm put out a research report called Valuing Ethereum, designed to introduce the cryptocurrency to investors. The paper looks at how Ethereum can be valued, and analyses its consensus mechanism, which is slowly changing to proof of stake.
In March, the firm introduced five more trusts, expanding further down the cryptocurrency market cap rankings. It added Basic Attention Token, Chainlink, Decentraland, Filecoin and Livepeer. Some of these have been more successful than others; Decentraland's trust picked up $15 million in funds by April 7, while Chainlink's trust only reached $3.9 million.
Grayscale now has 13 trusts along with its digital large cap fund—which looks after $526 million in assets. Across all of its funds, Grayscale is now looking after $45 billion of assets.
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