Bitcoin Investment Trust Is Not Worth Its Ultra-High Premium
Over the past five years, investors have become increasingly interested in cryptocurrencies as speculators debate whether the digital currencies will eventually reshape the financial industry.
Bitcoin has emerged as the most popular of these cryptocurrencies, but buying coins directly has a lot of drawbacks. For that reason, the Bitcoin Investment Trust (OTCMKTS:GBTC) has emerged as a popular way to dip a toe in the cryptocurrency pond using a regular brokerage account.
Like the cryptocurrency it tracks, GBTC is extremely volatile. The share price has lost more than half of its value in the space of a year. So, what are the benefits of owning GBTC?
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If you’re interested in bitcoin but not quite ready create your own wallet, you may want to buy GBTC. But keep in mind there are quite a few drawbacks to adding the Bitcoin Investment Trust to your holdings.
Why Not Buy Bitcoin?
The reason GBTC has become a popular investment vehicle for traders who want exposure to bitcoin is that it’s essentially the only pure bitcoin play that’s compatible with a traditional brokerage account.
The trust tracks the price of bitcoin and provides investors a way to bet on whether they think the cryptocurrency is headed up or down. For long-term investors with a hefty appetite for risk who believe bitcoin is the future, it makes for a great investment.
The reason GBTC exists is to remove some of the perceived red tape that an investment in bitcoin is saddled with.
Bitcoin’s decentralized nature is exactly the reason many experts see the cryptocurrency as the future of finance; however, that also takes away some of the security that investors are seeking. For example, if you lose your wallet password, you’ve lost your bitcoins. It’s also complicated to ensure your coins are passed on to family in the event of your death.
GBTC, on the other hand, is held in a traditional brokerage account so problems like lost passwords and inheritance issues are easily dealt with.
GBTC Cons
That added security comes at a price, though. GBTC stock charges a whopping 2% management fee each year, and on top of that, the fund trades at a massive premium to the actual price of bitcoins.
You’d have to own more than 1,000 shares of GBTC stock to be in possession of a single bitcoin. That’s a huge premium to pay for an investment that tracks the price of bitcoin and doesn’t afford you any protection against its volatile swings.
While GBTC gives investors more piece of mind than a traditional bitcoin wallet would, the trust tracks the price of bitcoin so there’s no cushion against the cryptocurrency’s wild swings.
Is Bitcoin Investment Trust Worth It?
From that perspective, I’d say it’s probably not worth owning GBTC because it’s extremely risky and volatile, and its premium is simply too high. If you’re really convinced that bitcoins are the future, it’s worth doing your research and finding a reputable wallet with which to purchase them.
However, if you’re still on the fence about the cryptocurrency but looking for a bit of exposure, there are other investments to consider that don’t charge such a high premium.
Overstock.com (NASDAQ:OSTK) is one such investment. The e-commerce company is in the midst of shifting its focus to becoming a cryptocurrency trading platform. The company accepts bitcoin as a payment method, and CEO Patrick Byrne has said the firm is holding on to 50% of those bitcoins rather than converting them to dollars.
The firm’s second quarter results disappointed with OSTK’s Medici blockchain business reporting a $3.3 million loss, but Byrne says the hit is all part and parcel with the company’s shifting strategy.
There are also quite a few blue chips out there that offer investors some exposure to blockchain, the technology that bitcoin runs on.
Microsoft (NASDAQ:MSFT), IBM (NYSE:IBM), Bank of America (NYSE:BAC) and JD.com (NASDAQ:JD) are all making investments in blockchain development, but their diversified businesses offer some protection if the cryptocurrency movement fizzles out.
The Bottom Line
GBTC is worth considering if you have a long timeline and you’re comfortable with a hefty amount of risk, but its ultra-high premium (even though the stock is far from its all-time highs) makes it difficult for me to recommend.
I don’t think the added benefits that GBTC offers are worth the extra cash, so if you’re that confident in bitcoin’s future, you’re probably better off buying the coins themselves.
As of this writing, Laura Hoy did not hold a position in any of the aforementioned securities.
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