If you want to speculate on the price of bitcoin -- and you aren't fond of sketchy bitcoin stocks -- Bitcoin Investment Trust (NASDAQOTH: GBTC) is the only way to do it with your brokerage account. It's an imperfect way to bet on bitcoin, but as the market's only bitcoin fund, it snaps up a lot of trading volume.
1. What is the Bitcoin Investment Trust (GBTC)?
This trust acts as a bitcoin fund of sorts, offering up the opportunity to bet on bitcoin by buying its shares. The trust owns bitcoins on its investors' behalf, entrusting them to the cryptocurrency custody service Xapo to keep them safe. Each share currently represents ownership of approximately 0.092 bitcoin, an amount that will slowly decrease over time as management fees are charged to the fund.
Image source: Getty Images.
2. What does it cost to own Bitcoin Investment Trust?
Funds are never free to own. The fund's sponsor, Grayscale Investment Trust, charges an annual management fee of 2% of the fund's assets. It's a relatively high management fee to pay, given gold ETFs charge as little as 0.25% per year to invest in physical gold stored in underground vaults. Amusingly, it costs more to keep bitcoin safe than it does to keep gold safe. Who would have thought?
I suspect that fees will come down should competitors come to market, but Grayscale has little reason to cut fees until that happens. Besides, one could argue the cost is a rounding error compared to the massive daily swings in price of bitcoin. Anyone who earned a 1,557.2% return on the trust in 2017 probably isn't too worried about the 2% management fee they paid that year.
To be sure, owning Bitcoin Investment Trust is a lot easier than buying the digital currency on an online cryptocurrency exchange. Convenience always comes at a higher price.
3. Is owning Bitcoin Investment Trust the same as owning bitcoin?
Yes and no. In theory, Bitcoin Investment Trust should generally rise in value when bitcoin rises, and fall when the price of bitcoin declines. In practice, on roughly one out of three trading days, bitcoin and Bitcoin Investment Trust actually moved in opposite directions.
The trust's popularity is to blame for its rather unpredictable performance. It's safe to say that Bitcoin Investment Trust is likely to outperform bitcoin when investors pile in, and underperform bitcoin when investors flee from its shares. It tends to overshoot both up and down, rising more than bitcoin when the digital currency soars in value, and falling faster than bitcoin when it declines in value.
Since going public, Bitcoin Investment Trust has closed at prices as high as 2.32 times the value of its underlying bitcoins. At its low, the trust closed at a price 0.1% lower than what its bitcoins were worth at the time. On any given day, the trust is likely to close at a value exceeding the value of its digital currency holdings, as on the median day it closed at a price 42% higher than what its bitcoins are worth.
If you can buy shares at a small premium, it may be worth paying up for the convenience of safely owning bitcoin through a vehicle you can buy or sell through an ordinary brokerage account. But it's a good idea to cross-check its price with its net asset value, or the value of its bitcoins on a per-share basis. It would be an unfortunate thing to pay such a high price that you end up losing money on Bitcoin Investment Trust over a period in which bitcoin rises in value.
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