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In recent months, the Grayscale Bitcoin Trust has received a lot of attention. Here’s how it works and what it implies for the cryptocurrency industry.
The Grayscale Bitcoin Trust is a stock market-based approach to invest in Bitcoin (GBTC). It is one of several such financial instruments that let investors to exchange shares in trusts that hold significant pools of Bitcoin, with each share valued at or around 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.”
According to Bitcointreasuries.org, the Grayscale Bitcoin Trust controls 654,885 Bitcoin, or 46 percent of the 1.4 million Bitcoin owned by publicly listed firms. As of April 8, 2021, GBTC is now trading at $47.57 and owns 0.00095 Bitcoin (worth $54.6) each share, according to official papers.
Did you know?
Grayscale was founded by Barry Silbert, who also runs the Digital Currency Group, a crypto venture capital firm that’s invested in Coinbase, Coindesk and Ripple.
How does the Grayscale Bitcoin Trust Work?
The Grayscale Bitcoin Trust works like this:
- 🤑 Grayscale invites a private pool of rich investors to pledge money to the fund, which it uses to buy up huge amounts of Bitcoin.
- 🏛️ Then, Grayscale lists that fund on public stock exchanges, meaning that anyone can trade shares in it.
- 📈 Shares in the fund track the price of Bitcoin, but only roughly.
The fund’s shares might trade at a premium or a discount to the current price of Bitcoin. They have nearly always traded at a premium in the past. This is wonderful news for Grayscale and its investors, who profit from the premium, but terrible news for other investors.
So, why would investors buy GBTC shares instead of Bitcoin outright? There are several causes for this:
For starters, investing in a Bitcoin Trust allows users to obtain exposure to Bitcoin without having to worry about how to store it, how to comply with the law, or how to file separate taxes.
When purchasing Bitcoin, you must deal with a slew of issues: How do you keep it? Do you have to pay someone to keep your Bitcoin safe? What if you misplace the key or your Bitcoin wallet gets hacked? The Grayscale Bitcoin Trust, as a publicly listed trust that reports to the US Securities and Exchange Commission (SEC), makes this simple to overlook.
Second, publicly traded Bitcoin trusts offer a variety of tax benefits. Certain IRAs, Roth IRAs, and other brokerages and investor accounts that will not provide tax benefits for Bitcoin investments will provide them for publicly traded trust investments. Grayscale’s Trust allows those investors to have exposure to Bitcoin in a tax-efficient manner.
Third, cryptocurrency trading is extremely exclusive. Bitcoin cannot be traded against Tesla or Apple shares (without using crypto stock-derivatives platforms). This effectively isolates the crypto economy from the regular economy. Traditional investors can invest in the crypto economy as soon as Bitcoin is listed on the stock exchange, but in a very expensive and limited fashion.
The Grayscale Bitcoin Trust is one of several publicly traded trusts, the largest of which being Grayscale. As of April 2021, rival ETC Group’s Bitcoin product has a market cap of $1.2 billion, while Wisdom Tree’s Bitcoin product has a market worth of $329.6 million.
Grayscale also provides a number of other exchange-traded products, albeit its Bitcoin product is by far the most popular. Its Ethereum Trust is the second largest, managing $6.4 billion in Ethereum. Bitcoin Cash, Ethereum Classic, Litecoin, Stellar Lumens, Horizen, and ZCash are among the others, as is a digital large-cap fund that includes BTC, ETH, LINK, BCH, and LTC.
Grayscale’s trust’s future success is far from certain. The shares of its competitors may be worth more than Grayscale’s, or they may offer cheaper fees.
GBTC vs Bitcoin ETF
Grayscale’s approach has benefited for a long time from the lack of a Bitcoin ETF, or exchange-traded fund. When you invest in a Grayscale Bitcoin Trust, you are purchasing shares in a trust; when you invest in an ETF, you are purchasing shares in a fund that directly follows the price of Bitcoin.
Bitcoin ETFs are not now permitted in the United States. Multiple applications for a Bitcoin ETF have been refused by the SEC on the basis that Bitcoin’s price may be manipulated. While investors in the United States wait for a Bitcoin ETF, which the SEC may never approve, Bitcoin trusts are the next best thing.
Things are a little different in Canada. Three Bitcoin ETFs have debuted, allowing investors to gain exposure to Bitcoin at a cheaper cost. The Purpose Bitcoin ETF, in instance, has already absorbed 14,660 Bitcoin worth $847 million. This new competition has diverted prospective money away from Grayscale, even turning its premium—the difference in price between GBTC shares and the underlying Bitcoin per share—negative.
Grayscale has responded by announcing intentions to convert the GBTC into a Bitcoin ETF. In April, the company stated that it is “100 percent committed to converting GBTC into an ETF.” It has also engaged ETF experts. However, for this strategy to succeed, the US Securities and Exchange Commission (SEC) must approve a Bitcoin ETF, which it has been unwilling to do thus far.
Meanwhile, Grayscale’s parent company, Digital Currency Group, has stated its intention to purchase up to $250 million in GBTC stock. DCG stated that it will utilize cash on hand to buy the shares on the open market. By raising demand in this way, it may be possible to counteract some of the negative premium.
Grayscale’s developments in 2021
While Grayscale’s largest trust is the GBTC, it has a few alternatives and has been increasing its lineup in 2021. Other trusts managed by the company include well-known cryptocurrencies such as Ethereum, Litecoin, and Bitcoin Cash.
The business released a research study called Valuing Ethereum in February to explain the cryptocurrency to investors. The study investigates how Ethereum might be valued and examines its consensus process, which is gradually shifting to proof of stake.
In March, the company launched five new trusts, moving it farther down the bitcoin market cap rankings. Basic Attention Token, Chainlink, Decentraland, Filecoin, and Livepeer were all included. Some have been more successful than others; Decentraland’s trust had raised $15 million by April 7, while Chainlink’s trust had only raised $3.9 million.
Grayscale presently manages $526 million in assets through 13 trusts and its digital big cap fund. Grayscale presently manages $45 billion in assets across all of its funds.