What’s an even better investment than Bitcoin? Grayscale’s Bitcoin Investment Trust. Shares in the Barry Silbert-led fund are up 1,600 percent over the past two years compared to bitcoin’s 973 percent. According to one fund expert, this means investors should “be wary”.
Writing for ETF.com, Sumit Roy said Grayscale’s trust (GBTC) now has a market value of $1.1 billion USD, compared to $224 million at the start of the year. That’s great for investors. But GBTC derives its share price from bitcoin — how does it manage, then, to increase in value far beyond that asset?
Grayscale’s fund is not an exchange-traded fund (ETF), although it shares many similarities. Real Bitcoin ETFs remain a chimera in the crypto world, after the U.S. Securities and Exchanges Commission (SEC) rejected the Winklevoss brothers’ proposal in March.
That’s also what makes it risky, according to Roy. An ETF would be strictly regulated under the Investment Company Act of 1940. These funds also have mechanisms to prevent the share premium rising too high over the underlying asset/s.
To clarify, the Bitcoin Investment Trust doesn’t actually trade on an exchange. Investors must buy shares via accredited investment advisors. It does, however, derive value from actual bitcoins it holds and stores with Xapo.
‘Astronomical’ and ‘Dangerous’ Premium Over Bitcoin Asset Value
Roy described GBTC’s “Premium to NAV” figure as “dangerous” and “astronomical”. Premium to net-asset-value (NAV) refers to the price of shares in a fund compared to the value of its underlying asset/s. ETF shares also sometimes attract a premium higher than the fund’s assets, though nothing like GBTC’s average of 40 percent since May 2015 and high of 142 percent.
Grayscale would apparently prefer its fund to become a proper ETF. In January the company filed with the SEC to do an initial public offering on the New York Stock Exchange. The application hasn’t been approved yet, however it looks unlikely after the SEC rejected the the Winklevoss proposal — citing Bitcoin’s risks and lack of regulation.
As Risky as Bitcoin Itself?
In many ways, Roy’s warnings about putting money into GBTC are similar to those about putting money into Bitcoin itself. Both have rocketed in value on what looks like pure speculation. Neither can claim its value is based on existing utility and both could likely plunge tomorrow.
Roy appears to be warning mainly against those who think GBTC is a regulated ETF, which it definitely isn’t. To date no regulator has allowed a fund operator to hold bitcoin and sell shares as an ETF — something considered key to bringing large institutional investors into bitcoin. That means Grayscale’s fund is the only way for large U.S. investors to get into bitcoin without actually holding it… for now.
BitcoinETI, a European fund that trades on the Gibraltar Stock Exchange and Germany’s Deutsche Boerse, is an “exchange-traded note” (ETN). ETNs differ from ETFs in that operators do not hold any of the underlying asset, and the fund merely tracks the price. Therefore they are closer in nature to bonds than stocks.
Grayscale’s Cryptocurrency Bets
According to Grayscale’s website, the company is “building transparent, familiar investment products that facilitate access to this burgeoning asset class, and provide the springboard to invest in the new digital currency-powered ‘internet of money.'”
It also operates the Ethereum Classic Investment Trust, which went live in April 2017. Silbert famously threw his support behind ETC soon after Ethereum’s 2016 hard fork created twin networks that survive to this day.
Bought my first non-bitcoin digital currency…Ethereum Classic (ETC)
At $0.50, risk/return felt right. And I'm philosophically on board
— Barry Silbert (@BarrySilbert) July 25, 2016
At the time, a little-loved ETC was worth 50 cents. Today it’s over $17. Whatever foresight Silbert has, it seems plenty of investors are willing to pay a high price to share it.
Would you invest in a bitcoin or crypto-based fund? Which one and why?
Images via Grayscale, Pixabay