The Grayscale Bitcoin Trust(GBTC): What is it and How it works

Introduction

For people, businesses, and institutions new to the world of cryptocurrencies and who want to invest in Bitcoin without actively managing it, Grayscale Bitcoin Trust (GBTC), an investment trust traded on the stock market, is a fantastic choice. 

About Grayscale Bitcoin Trust

The biggest Bitcoin fund in the world is called Grayscale Bitcoin Trust (GBTC). It is also the first publicly traded trust in history whose value is derived from a digital currency. Here’s a brief explanation if you don’t know what it means.

On public stock exchanges, trusts and funds have an underlying asset determining their worth. The majority of these assets are equities in publicly traded businesses. Based on the underlying net asset value (NAV), which is influenced by the demand for support, the price of the trust or fund changes over time. By purchasing shares in the fund, an investor can buy a portion of the asset.

Since GBTC is a trust that invests in cryptocurrencies, you can purchase its shares using your brokerage account. By doing this, you skip the inconvenience of buying BTC through a cryptocurrency exchange and indirectly purchase it. This implies that you depend on Grayscale to act as a middleman and buy and hold Bitcoin on your behalf.

As a result, the actual Bitcoins are kept in the Grayscale Institutional Trust, while its retail index is traded on the open or over-the-counter markets. GBTC is comparable to a cryptocurrency exchange-traded fund (ETF) since it pools investors’ money to buy Bitcoin and levies a management fee on investors who choose to invest in it.

Grayscale Bitcoin Trust Work

Grayscale Bitcoin Trust raises funds from institutional investors, typically U.S. dollars (USD), and uses those funds to purchase Bitcoin directly. 

These BTC are kept in the Grayscale fund, making the Grayscale institution the valid owner of the BTC rather than its investors. 

So, you can indirectly own Bitcoin by purchasing shares of GBTC.

Several investors had invested a lot of money into GBTC by purchasing Grayscale stocks throughout bull market cycles ever since Grayscale became a publicly traded fund in 2015 when it first started doing so.

With that money, Grayscale has purchased a growing number of bitcoins.

As of this writing (25/7/2022), it has accumulated 643,572 bitcoins or about $13.5 billion in assets.

To put that amount into context, consider that Ukraine and Tesla each have about 46,000 bitcoins.

GBTC Shares- Premiums and Discounts

The trust does not instantly buy or sell BTC with your money when you buy or sell GBTC shares. As a result, the ideas of premium and discount are relevant and must be understood if you wish to comprehend how GBTC operates.

Assume that shareholders purchased all 500,000 BTC owned by the Grayscale trust. Then five investors enter, and each buys GBTC shares for 1,000 BTC.

By raising the proportion of bitcoins held by GBTC investors to those owned by Grayscale as an organisation, those acquisitions will increase the trust’s overall worth. That’s a result of GBTC delaying the purchase of 5,000 additional BTC with the new investment.

This indicates that there is a higher demand than supply for GBTC shares. In this scenario, the trust will increase the value of BTC. The premium will then be added to the share value for anyone purchasing GBTC shares.

Similarly, new investors will receive a discount if several investors decide to sell their GBTC shares. Due to this fluctuation, the price you must purchase BTC is different from the one you would receive by purchasing it straight from exchanges. Because of this, the prices of GBTC shares differ from the actual worth of bitcoin.

Finally, unlike BTC spot buying and selling, available 24/7, GBTC share purchases and sales are only permitted during the stock market’s regular business hours.

Advantages and Disadvantages of GBTC

Advantages of GBTC

1. Increased Cold Storage Security– Hackers and con artists can access cryptocurrency exchanges and wallets. For keeping their Bitcoin in cold storage, which is secure from attacks, GTBC charges a maintenance fee.
2. The Bitcoin Investment Trust is regularly audited– It submits its audited reports to the Securities and Exchange Commission (SEC) to verify that the Grayscale Bitcoin Trust has the Bitcoin investors have paid for. This is a benefit compared to crypto exchanges, which can defraud users. The 2019 QuadrigaCX exchange scandal serves as an illustration of one such scam.
3. Tax Benefits- Investors can receive tax advantages when purchasing GBTC shares through tax-advantaged plans like a 401(k) or an IRA. Tax filing for publicly traded stocks of a trust that has received SEC approval is also more straightforward for investors.

Disadvantages of GBTC

1. Not Appropriate for Smaller Investors– GBTC levies an annual fee of 2%. Additionally, when demand is high, you must pay a premium to purchase shares. Grayscale Bitcoin Trust requires a minimum commitment of $50,000, making it unsuitable for smaller investors.
2. You Never Really Own Any Bitcoin– Because the Grayscale trust owns the private keys to the BTC in your shares, you will never be able to exchange your shares for real Bitcoin.
3. The Growing Performance Divide– A GBTC share’s value has not increased as quickly as the underlying asset’s value. Even if you don’t have to pay a premium, purchasing shares will still result in lower profits than directly holding Bitcoin. Between 2020 and 2021, the value of GBTC’s shares rose by almost 220%, while the worth of BTC rose by nearly 340%.

Is GBTC a good investment

The value of GBTC shares does not fairly reflect the value of Bitcoin. Hence it is not a wise investment choice. Additionally, since early March 2021, its shares have been trading at a discount.

As a result, if you purchase GBTC shares today for the same USD, you will receive fewer BTC than you would through spot trading.

Because you do not possess the private keys to the BTC contained in your shares, investing in GBTC does not grant you are voting privileges on protocols. Additionally, government agents censor transactions made on the trust, defeating the intended goal of decentralised digital money.

For accredited investors who can buy GBTC shares at the NAV price in the future, Grayscale might be a wise choice if the shares start trading at a premium once more.

Conclusion

Overall, only a few wealthy investors should consider GBTC a feasible alternative. However, given that there are now just Bitcoin futures ETFs, GBTC may very well become a fantastic source of investment if approved as a Bitcoin spot ETF in the United States. However, there are still obstacles in its path to becoming a Bitcoin ETF. Therefore, despite the current volatility of the cryptocurrency market, Grayscale will continue to be a cryptocurrency trust, even though it could be cheaper and safer for ordinary investors to buy Bitcoin directly.