The Bitcoin Investment Trust (OTC: GBTC) is one of the most popular ways for retail traders to make bets on bitcoin. Unfortunately, many GBTC investors don’t fully understand exactly what it is they are buying and the risks involved.
For starters, the GBTC is a trust which buys and holds bitcoin. As of mid-Decmber, each share of the GBTC ETF represents 0.0919 bitcoin based on the total bitcoin holdings in the trust and its share structure.
The Inside Scoop
The GBTC trust is operated by Grayscale Investments, and Grayscale’s director of business development Michael Sonnenshein joined Benzinga’s PreMarket Prep earlier this week for its special bitcoin episode to discuss the GBTC offering. Sonnenshein said Grayscale used the SPDR Gold Trust (ETF) (NYSE: GLD) as a model for the GBTC.
“The structure itself is a trust that passively and fully owns bitcoin,” Sonnenshein said on the show. “There’s no leverage, no trading, no cash, no other assets at all other than bitcoin.”
In May 2015, Grayscale gained regulatory approval to improve liquidity for its private investors by having shares of the trust trade on the U.S. OTC Market.
A Unique Challenge
Unlike the GLD ETF, which buys and stores physical gold, Grayscale has a unique challenge in storing and protecting its digital bitcoin holdings.
“For GBTC, we have leveraged a third-party custodian, a firm called Xapo,” Sonnenshein said. “There is super intense cryptographic physical security as well as geographic dispersion such that there security model has no single point of failure.”
The Value Problem
Unfortunately, due to the fact it's currently the only bitcoin trust of its kind out there for investors, traders have driven the price of the GBTC way above the value of the bitcoin it holds. In fact, the GBTC trust has consistently traded at a 50 percent premium to its assets under management.
It’s easy for investors to calculate this premium on their own. Each share of the GBTC trust represents ownership of 0.0919 bitcoin. The current price of bitcoin is $16,694, which means a single share of the GBTC trust represents $1,534 worth of bitcoin at today’s price. However, the GBTC is currently trading at $2,611 per share.
But while an inflated premium to NAV is a huge risk for GBTC bulls, GBTC bears also have their share or risks to manage. According to financial analytics firm S3 Partners, GBTC short sellers have lost more than $39 million since late October alone. To make matters worse, analyst Ihor Dusaniwsky said short sellers have been paying 10 to 20 percent borrowing fees all year, and fees will likely continue to climb along with short interest.
“Long GBTC holders may feel the pain of its 53% asset premium shrinking, while short sellers will probably be incurring a 50%+ stock borrow fee – both sides will be paying a premium in order to ride the Bitcoin rollercoaster once the CBOE futures start trading,” Dusaniwsky said earlier this month.
The Only Game In Town
It’s been a crazy year for bitcoin investors. But as much risk as there is in the underlying price of bitcoin itself, the GBTC trust has an extra layer or risk for both bitcoin bears and bulls due to its steep premium to asset value and its extremely high (and rising) borrow fees. However, when it comes to trading the wild daily swings in the cryptocurrency market, there are GBTC is the only game in town until the SEC approves additional bitcoin ETFs or trusts.
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PreMarket Prep is a daily trading ideas show hosted by former floor trader Joel Elconin and prop trader Dennis Dick. You can listen to the show live and participate in our chatroom every day from 8-9 a.m. ET here. The show is also available on YouTube Live. The podcast is available on iTunes, Soundcloud, and Stitcher.
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