Investment inflows into the world's biggest publicly traded Bitcoin investment trust are pivotal to the price of Bitcoin (BTCUSD), according to a recent report from strategists at JPMorgan. The Grayscale Bitcoin Trust (GBTC), a Bitcoin holding company, has $13.1 billion assets under management (AUM) and is valued at more than $18 billion in OTC markets.

Key Takeaways

  • JPMorgan strategists say that investor inflows into the Grayscale Bitcoin Trust are "too big" for Bitcoin price correction.
  • The Grayscale Bitcoin Trust is a publicly traded statutory trust in OTC markets with substantial holdings of the cryptocurrency.
  • The trust provides indirect exposure to Bitcoin, but investment into the trust comes with significant riders and risks.

JPMorgan's strategists write that the inflows into GBTC "are too big to allow any position unwinding by momentum traders to create sustained negative price dynamics." In other words, investor enthusiasm for GBTC shares is a determinant of Bitcoin's price trajectory, and other Bitcoin traders do not possess sufficient market share or Bitcoin holdings to influence a correction in the cryptocurrency’s price. 

It is difficult to gauge the extent to which GBTC influences Bitcoin prices (or vice versa) because there is little transparency to the Bitcoin ecosystem. The thin liquidity of the cryptocurrency's markets also adds to the problem. What is certain, however, is that GBTC shares benefit from a rise in Bitcoin price, enabling it to purchase more of the cryptocurrency for its holdings.

Bitcoin price has skyrocketed to new records recently on the back of macroeconomic instability and solid moves by institutional investors to explore or move into cryptocurrency markets. Analysts have predicted a price correction but have not specified a time frame for the event.

What Is the Grayscale Bitcoin Trust?  

According to Bitcointreasuries.org, a site that tracks Bitcoin holdings for publicly traded investment trusts and firms, GBTC holds 572,644 Bitcoin, or approximately 50% of the 1,150,622 Bitcoin in circulation at these ventures. About 18.6 million Bitcoin have been mined so far, and GBTC holds roughly 3.1% of the asset.

The trust company has reported an impressive array of statistics regarding investor inflows into its product since the beginning of this year. For example, its AUM jumped from $2 billion last December to $5.9 billion this past August, before shooting up to the current $13.1 billion figure. JPMorgan's strategists estimate that GBTC is adding assets at a rapid clip of $1 billion per month.

For institutional investors and hedge funds, GBTC is a convenient vehicle to gain indirect exposure to a volatile asset, without paying the associated costs such as custody. They can move into a Bitcoin trade when its price is on an upswing and exit when it drops.

For example, investment firm Guggenheim Partners has reserved the right to invest up to 10% from one of its funds into GBTC. The arrangement has several upsides for Guggenheim to profit from Bitcoin's soaring price and not much downside since it does not have to purchase or own the cryptocurrency. GBTC's organization as a trust adds tax benefits to the Bitcoin trade.

However, those benefits come at a hefty premium to the Bitcoin price. During the 2017 bull run in cryptocurrency prices, GBTC shares traded at a 100% premium to the actual spot price of Bitcoin at crypto exchanges. GBTC's shares also often mimic the volatile price movements of its holding asset. This year alone, the trust's share price is up by 238% in OTC markets.

Finally, the trust's complicated setup – its shares are created in private placement transactions in primary markets and subsequently traded in public OTC markets – means that private investors can offload their shares at a premium in public markets, regardless of the underlying asset's actual worth. For example, if the trust creates fewer shares in the private market and demand skyrockets due to surging Bitcoin prices, then traders in the OTC market will have to pay unrealistic premiums to own Bitcoin through GBTC.