Cryptocurrency bitcoin's price has dropped in 2018 after reaching record-setting price levels in 2017. However, even seasoned investors may be reluctant to get involved in direct investments relating to cryptocurrencies, or digital currencies, since they're usually highly speculative, the market is largely unregulated, and storing them safely can be challenging. An over-the-counter trust focusing on bitcoin, in particular, the Bitcoin Investment Trust from Grayscale Investments (GBTC), can help simplify the process, but it also comes with disadvantages, such as a high premium and annual fee.
More About the Bitcoin Investment Trust
The Bitcoin Investment Trust debuted on Sept. 25, 2013. Grayscale Investments calls it a traditional investment vehicle with shares titled in the investor's name. Although the Bitcoin Investment Trust is not an ETF itself, Grayscale says it's modeled on the SPDR Gold Trust, a physically backed ETF.
GBTC is traded publicly on the OTCQX, an over-the-counter market, under the Alternative Reporting Standard for companies not required to register with the Securities and Exchange Commission (SEC). Its success mirrors that of Bitcoin because its value is derived solely from that cryptocurrency.
As of October 2018, GBTC had $1.34 billion assets under management (AUM) and 2.06 million shares outstanding. The trust requires a minimum investment of $50,000 and charges an annual fee of 2.0 percent, which accrues daily.
Grayscale suggests that its management of the fund is worth more than the annual fee, and one of its major selling points is its security. Storing cryptocurrency safely is notoriously challenging, and the company assures investors that the Bitcoin Investment Trust's assets "are safeguarded by a robust security system that uses industry-leading security standards."
How to Buy Bitcoin
Disadvantages of GBTC
Andrew Left of Citron Research has publicly criticized the Bitcoin Investment Trust, and Citron has tweeted that GBTC is the "most dangerous way to own Bitcoin." Possible disadvantages of investing in the Bitcoin Investment Trust include paying high premiums along with the annual fee, along with the risk factors associated with the overall volatility in the cryptocurrency market, as well as with investments vehicles that aren't required to register with the SEC.
Because the Bitcoin Investment Trust is currently the only fund of its kind specifically for bitcoin, investors have been paying a high premium. In Sept. 2018, shares of GBTC traded at a high of $7.95, which was around 20% higher than the value of the bitcoin within the trust that each share represented at that time. Although that premium is significant, it’s lower than it has been in the past — GBTC has closed at prices more than two times the value of its underlying bitcoins.
As of Oct. 2018, each share of GBTC represented less than 0.0001 bitcoin. That means it would take more than 1,000 shares of GBTC to own one bitcoin. GBTC saw a steady increase in 2017 and peaked at the end of the year. However, its performance in 2018 has fluctuated, and overall, GBTC has trended downward, with a nearly 65% year-to-date decline as of Oct. 2018. Steeper declines could mean that shares could lose most or all of their value.
Another possible disadvantage to consider is that Bitcoin Investment Trust's shares are restricted to a one-year holding period before investors can resell them in the public market, so investors need to weigh the risks of having no liquidity for that period of time.