What’s up with the Grayscale Bitcoin Trust?
The “Trust” part is what is in question.
Bitcoin has been falling in price lately, with the price hovering around $15,700 as of this writing. This has caused a lot of investors to investigate whether or not it’s a good investment. One way to invest in Bitcoin is through Grayscale Bitcoin Trust (GBTC), which trades on the stock market. In this blog post, we’ll look at GBTC and whether it’s a good investment.
What is GBTC?
Grayscale Bitcoin Trust is a trust that holds Bitcoin and trades on the stock market. The Bitcoin held by the trust is not physical but rather is stored in cold storage, which means it’s not accessible by hackers. The trust was created in 2013 and is managed by Digital Currency Group. As of today, GBTC has about $10 billion in assets under management.
The Benefits of Investing in GBTC
One benefit of investing in GBTC is that it allows investors to gain exposure to Bitcoin without having to worry about storing it securely or dealing with the tax implications since the trust is taxed as an asset. Another benefit is that GBTC trade on regular stock exchanges, which makes buying and selling easier than dealing with cryptocurrency exchanges.
The Risks of Investing in GBTC
However, there are also risks associated with GBTC. For example, because GBTC doesn’t track the price of Bitcoin Perfectly, investors could end up overpaying or underselling when they buy or sell shares. Additionally, GBTC charges a 2% annual management fee, which is higher than most ETFs. So, before you invest in GBTC, make sure you understand both the benefits and risks involved.
The right-hand scale of the chart below shows that GBTC is currently trading at a 45.2% discount to the Net Asset Value (NAV) of the Bitcoin held. Prior to March 2021 (indicated in red on the chart), you can see that GBTC traded at a premium to the underlying asset. Since then, the discount to NAV has steadily increased.
Grayscale proposed to convert the Trust to a spot Bitcoin ETF in June 2022 but was disapproved by the Security Exchange Commission (SEC). Trading as an ETF would have eliminated the discount. Grayscale is appealing the ruling. Current Bitcoin ETFs are based on the CME’s Bitcoin futures, with the SEC saying that futures are regulated, and spot Bitcoin is not.
Grayscale’s Proof-of-Reserves Policy Draws Scrutiny
Recently, crypto investment firm Grayscale has come under fire for its refusal to share proof-of-reserves with the public. This proof-of-reserves is a document that shows how much of each asset the firm holds and is used by many investors to gauge the health and solvency of a firm. So why has Grayscale chosen not to share this information?
Grayscale’s stance is that its proof-of-reserves should be kept private to protect the firm’s clients. The thinking goes that if the proof-of-reserves were made public, then bad actors could use it to try and destabilize the firm. However, many investors are sceptical of this reasoning, as other firms in the space have managed to publicly share their proof-of-reserves without incident.
Investors are also worried that Grayscale is hiding something. After all, if the firm was truly solvent and had nothing to hide, then there would be no reason not to share the proof-of-reserves. The fact that Grayscale is being so secretive has led some to believe that the firm might not be as healthy as it claims to be. Only time will tell whether or not these concerns are founded, but in the meantime, Grayscale’s refusal to share its proof-of-reserves is certainly drawing a lot of scrutiny from the investing community.
Grayscale’s decision to keep its proof-of-reserves private has raised eyebrows among many investors. While the firm claims that it is doing so to protect its clients, some worry that Grayscale might be hiding something. Only time will tell how this situation plays out, but for now, Grayscale’s lack of transparency is certainly cause for concern.
Michael Cornips is the Managing Director and Founder of Emerald Financial.
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