By Elena Obukhova, founder & CEO at FAS | Fintech Advisory Services
According to Grayscale’s official website, Grayscale Bitcoin Trust is a traditional investment vehicle with shares titled in the investors name, providing a familiar structure for financial and tax advisors and easy transferability to beneficiaries under estate laws.
The phrase “for financial and tax advisors and easy transferability to beneficiaries” tells us enough to understand the primary focus of the GBTC instrument. GBTC is available for accredited investors, and your minimum buy-in should be $50K. They also charge a 2.0% annual account fee, accrued daily. GBTC, unlike Bitcoin, is not an instrument that democratises payments and makes financial transactions accessible to the masses. That is something very important to understand.
GBTC is traded at OTCQX and available to a limited number of countries, while Bitcoin is traded globally and available to everyone (even to those residents whose countries are not allowed to hold Bitcoin).
I decided to read different forums and look up for some articles that are covering some benefits of GBTC over BTC. I’ve found a few very common answers and wanted to cover them here:
1. GBTC is easier to buy
You need to have $50K to buy-in that makes it already quite complicated for a general retail investor to purchase GBTC, while they can easily buy Bitcoin at any crypto exchange with any amount. Another fact to keep in mind is that traditional markets have working hours and they can be closed. If you would like to withdraw your funds on Saturday night, you will be quite disappointed as your funds are being imprisoned. However, if you’re a Bitcoin holder, you can sell it at any time you want (and if you want).
Why was this statement listed in favour of GBTC? Many institutions are not yet fully exposed to cryptocurrency markets and would find GBTC a simpler way to invest in Bitcoin rather than investing in the base asset itself.
2. More liquidity
OTCQX, the market where GBTC is currently being traded at has a daily volume of US$ 729.5 million while, centralised cryptocurrency exchange Binance, for example, has a 24H trading volume of $26 billion. I feel quite secured to get enough liquidity there. Although it’s important to admit that large buy/sells orders affect the market price. Thus it makes it quite difficult to place such orders at centralised cryptocurrency exchanges. Usually, these investors would go for a crypto OTC market. I came across such deals many times in China, where institutional investors and HNWIs are trying to find a Bitcoin buyer/seller with a transaction volume of $1 million — $20 million. That sometimes can be very time-consuming and painful, thus, ETFs can be a decent option in this case to get a large Bitcoin holding.
3. No hustle
I would imagine a lot of hustle trying to mimic S&P500 portfolio and would rather go for ETF that can do it for me. However, it’s not persuasive for me to invest in the fund that trades this one same asset that I can purchase directly with less “paperwork” unless it generates me a much bigger ROI.
I can open a crypto account within a few minutes and up to maybe a couple of days (based on KYC procedure). Then I buy Bitcoin within seconds and can trade 24/7. However, opening a brokerage account can be tougher play, especially when you also need to confirm the status of an accredited investor.
4. Clear taxation
With GBTC being a traditional investment instrument, I agree that it might be easier to go through taxation procedure however, there’s a growing number of projects that remove crypto accounting stress from you and make this process as simple as filling in information on your traditional financial assets.
A quick 1-year comparison of GBTC vs. BTC for the period between March 16th, 2020 and March 12th, 2021 showed some interesting results as well.
The average daily return turned out to be quite close to 0.87% (GBTC) and 0.94% (BTC) and a standard deviation of 0.056 (GBTC) and 0.043 (BTC), which actually makes BTC an asset with smaller volatility and larger average return compared to GBTC. February showed a very similar picture where average daily returns were 1.15% and 1.7%, while the standard deviation values were 0.072 and 0.061 for GBTC and BTC, respectively.
Trading at Discount: Current State of GBTC
The market has been largely evolving and empowering retail investor to play a bigger role in price fluctuations. The recent events showed that the crowd can be quite powerful when it comes to market manipulations.
Before talking about GBTC and why it is traded at discount, let’s divide all Bitcoin holders into core groups:
- Bitcoiners, true believers that are holding Bitcoin long-term
- Bitcoin whales, also believers but with bigger funds
- Retail investors who decided to diversify their portfolio with Bitcoin
- Newcomers willing to get quick gains
- People in developing countries using Bitcoin as a saving tool against inflation
- Institutional investors and non-Bitcoiners HNWIs
Among all these categories, the last one (Institutional investors and non-Bitcoiners HNWIs) would be choosing between Bitcoin and GBTC. Bitcoin and GBTC prices can go very different ways. Bitcoin community is growing and getting more and more holders who believe in its future. Additionally, there’s a growing number of people questioning the centralised financial system worldwide and refusing from fiat money in favour of cryptocurrencies.
GBTC doesn’t have such a community of believers and therefore strongly relies on the current moods within institutional investors that constitute 80% of its funds. They tend to be more careful compared to “YOLO traders” that can suddenly allocate all their fund to Bitcoin.
GBTC has been traded at a discount for the last 30 days indicating that investors were actively withdrawing their funds. If the discount remains, it will cause some losses to the existing investors. Naturally, they would need the premium to increase in order to obtain the profit as for the moment each share costs less than the market price of the underlined asset.
Having looked at the 1-year price history, I could see that GBTC is slightly underperforming Bitcoin. However, this “slightly” started increasing and making GBTC less attractive to institutional investors while Bitcoin price remains its position in the upward channel.
Being a Bitcoiner, I would, of course, go for the underlined asset itself without a second thought, however, for some institutional investors and HNWIs, GBTC still can be a reasonable choice due to some legal and tax-related issues. Nevertheless, Grayscale would need to work on their current strategy as the long-lasting discount is going to add some challenges for the fund to bring more investments in.