Summary
The Grayscale Bitcoin Trust is a financial instrument that allows investors to trade shares in a trust that holds large amounts of Bitcoin.
The fund's share price tracks the price of Bitcoin, but not exactly.
Grayscale also offers a number of other exchange-traded products, with prices tracking the prices of cryptocurrencies such as Ethereum, Bitcoin Cash and Litecoin.
What is Grayscale Bitcoin Trust (GBTC)?
There is one way to invest in Bitcoin on the stock market: the Grayscale Bitcoin Trust (GBTC). It is one of several financial instruments that allow investors to trade stocks in trust funds that hold large amounts of Bitcoin, with each stock priced close to the price of Bitcoin.
Grayscale Bitcoin Trust represents $6.5 billion in privately invested Bitcoin assets as of October 2020. Grayscale, an American crypto investment company and one of the world’s largest Bitcoin purchasers, launched the trust in September 2013. It trades under the ticker “GBTC.”
According to Bitcointreasuries.org, Grayscale Bitcoin Trust holds 456,537 bitcoins, accounting for 58% of the 786,059 bitcoins held by publicly traded companies.
Grayscale Bitcoin Trust has made headlines for its rapid growth. On June 9, 2020, the trust held 384,953 bitcoins, an increase of about 70 bitcoins in four and a half months.
How does the Grayscale Bitcoin Trust work?
Here’s how the Grayscale Bitcoin Trust works:
Grayscale invites private wealthy investors to pledge money to the fund to purchase large quantities of Bitcoin.
Grayscale then lists the fund on a public stock exchange, meaning anyone can trade its shares.
The fund's share price will track the price of Bitcoin, but not exactly.
The fund's shares can trade at a premium or discount to the actual price of Bitcoin. Historically, they almost always trade at a premium. This is good news for Grayscale and its investors, who make money from this premium, but bad news for other investors.
So why would investors buy shares of the Grayscale Bitcoin Trust instead of buying Bitcoin directly? Here are a few reasons:
First, investing in a Bitcoin Trust allows people to get exposure to Bitcoin without having to worry about how to store it, whether it violates the law, and how to pay taxes.
If you're buying Bitcoin, there are a lot of things you need to keep in mind: How do you store it? Do you need to pay someone to hold your Bitcoin? What if you lose your keys or your Bitcoin wallet is hacked? As a publicly traded trust company that reports to the U.S. Securities and Exchange Commission (SEC), Grayscale Bitcoin Trust allows you to not have to think about these issues.
Second, publicly traded Bitcoin trusts have various tax benefits. Certain brokerages and investor accounts such as IRAs and Roth IRAs do not give tax benefits to Bitcoin investments, but do give tax benefits to publicly traded trust investments. Grayscale's trust provides those investors with Bitcoin exposure in a tax-friendly way.
Third, crypto trading is very isolated. You can't trade Tesla and Apple stocks with Bitcoin (without using crypto stock derivatives platforms). This cuts off the crypto economy from the traditional economy. However, as long as you list Bitcoin on a stock exchange, traditional investors can invest in the crypto economy, albeit at a very expensive price and in limited quantities.
Grayscale Bitcoin Trust is the largest of several publicly listed trusts. As of October 2020, competitor ETC Group’s Bitcoin product had a market value of $60 million and Wisdom Tree’s Bitcoin product had a market value of $34.5 million.
In addition to its largest Bitcoin product, Grayscale also offers several other exchange-traded products. Its Ethereum Trust is the second-largest product, managing $928 million worth of ETH. Other products include BCH, ETC, LTC, Stellar Lumens, XRP, Horizen, and ZCash, as well as a digital large-cap fund that includes BTC, ETH, XRP, BCH, and LTC.
The future success of the Grayscale Trust is far less secure. Its competitors’ stocks may be more representative of the price of Bitcoin than Grayscale’s, or they may charge lower fees.
Grayscale Bitcoin Trust vs Bitcoin ETF
In addition, Grayscale's model benefits from the fact that there are currently no Bitcoin ETFs, or exchange-traded funds, in the market. With Grayscale Bitcoin Trust, you buy shares in the trust; with ETFs, you invest in a fund that directly tracks the price of Bitcoin.
