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Everything You Need to Know About the Grayscale Bitcoin Trust

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What You Need to Know

  • The Grayscale Bitcoin Trust (GBTC) is a simple way to make a Bitcoin investment through the stock market.
  • While GBTC eliminates some hassles and risks of investing in Bitcoin directly, those benefits come at a cost.
  • A Bitcoin ETF could render the trust obsolete.

The Grayscale Bitcoin Trust (GBTC) is the latest answer to a longstanding question on digital currency: Is it possible to invest in Bitcoin via the stock market? Until quite recently, the mechanisms available for doing that were quite limited, but the GBTC is aiming to change that. 

Put simply, the GBTC is a financial vehicle that allows investors to invest in trusts that, in turn, hold large amounts of Bitcoin. This means that as the price of BTC rises (or falls), shares in these trusts track the value of the cryptocurrency — but only roughly. Investing in BTC in this way offers several key advantages to investors, and not least the fact that investments are regulated by the Securities and Exchange Commission. 

In this guide, we’ll take a look at what the GBTC is, how it works, and which investors it is suitable for.

What Is the Grayscale Bitcoin Trust?

The GBTC is an example of a new type of fund that is exploring the value of Bitcoin in novel ways. The fund launched back in 2013 as the Bitcoin Investment Trust (BIT) and has grown rapidly since then. The GBTC now allows investors to gain BTC exposure through a private trust that trades directly on the U.S. stock market (as “GBTC”). 

As of April 2021, the GBTC holds 654,885 Bitcoin. This represents roughly 46% of the 1.4 million Bitcoin that is currently held by publicly traded companies. That also makes the GBTC the largest Bitcoin fund in the world.

Funds like GBTC allow investors a way of indirectly trading BTC directly through the stock market. Currently, regulators in the U.S. (by far the largest stock market, and by far the largest market for cryptocurrencies) do not allow crypto to be directly traded through stock markets, because they believe these currencies to be insufficiently regulated.

How Does GBTC Work?

Though the idea behind the GBTC is to open up crypto investment to as many people as possible, in practice it’s not possible to just buy into the fund at market prices. Here’s how it actually works.

First, Grayscale invites a pool of wealthy investors to give cash to the fund, and it uses this money to buy Bitcoin. Next, Grayscale places the fund on public stock exchanges, allowing anyone to buy and sell shares. 

As the price of Bitcoin increases (or falls), the value of the fund tracks this price. This means that the fund itself, as well as shares in it, follows the price of BTC. This process means that accredited investors — or those invited to contribute to the fund during its initial, private round — make a direct return on reselling their shares. 

Is the Grayscale Bitcoin Trust a Good Investment?

That depends on an investor’s priorities and risk tolerance. Not owning Bitcoin directly has a number of advantages — which we’ll come to below — but funds like GBTC also have some drawbacks, such as a relatively high cost of entry.

Because of this, it’s likely that GBTC will only ever make up a small proportion of the average investor’s portfolio. As a general rule of thumb, you should not invest more than 15% of your portfolio into BTC anyway, and this places an upper limit on how much the average person should put into a fund like GBTC.

Advantages of GBTC

Let’s look at the advantages and disadvantages of the GBTC in more detail. At the moment, the fund is primarily focused on those who are interested in investing in BTC anyway, but who have some concerns about doing this. That’s a good starting point for understanding the value of the GBTC: Why would one purchase shares in GBTC rather than buying BTC directly?

There are a number of reasons. One is that working out how to store Bitcoin securely can be difficult. Another is that filing taxes for gains made on shares — such as those from investing in GBTC — is much less complex than the tax regime that applies to crypto holdings. And then there is the fact that many people still feel uncomfortable putting large sums into BTC, especially given the recent revelations that 95% of BTC trading is fake

GBTC is an investment that is overseen by the SEC, but still has significant exposure to the price of Bitcoin, allowing risk-conscious investors to take advantage of price shifts.

Disadvantages of GBTC

On the other hand, there are a number of disadvantages of investing in GBTC, as opposed to buying Bitcoin directly. The first, and most obvious, is that since shares in the trust trade at a premium, they come with a significant up-front cost. This up-front cost is likely to be unimportant in an investment that lasts for five years or so, but by that time GBTC could have plenty more competitors than it does now (and which we’ll look at below).

Secondly, because the GBTC doesn’t track the price of Bitcoin directly, it can take a while for price fluctuations in BTC to be reflected in the price of the GBTC. 

How Can I Buy GBTC?

The trust is traded on the over-the-counter market. Investors can buy shares in GBTC just as they would other stocks and shares — through a broker or advisor, or via an online trading platform. That opens up a whole range of options for investors. With instruments like GBTC, investors can trade BTC against stocks in other companies, albeit in quite a limited, expensive way.

Is There Competition to the Grayscale Bitcoin Trust?

There are some direct competitors for the GBTC, though none are able to match its size or buying power. The GBTC is just one of several trusts being traded publicly with significant BTC exposure. 

But the GBTC might be rendered obsolete fairly soon. Many firms have been struggling to get a BTC ETF approved for much of the last decade, and the GBTC has undoubtedly benefited from the lack of a full Bitcoin ETF. However, with the recent news that the very first Bitcoin ETF — the Purpose Bitcoin ETF — has been approved in Canada, more expensive funds like GBTC could lose traction.

The Bottom Line

Ultimately, the Grayscale Bitcoin Trust allows investors to gain exposure to the Bitcoin marketplace in a way that simplifies taxes and storage, and provides federal oversight. But those benefits come at a relatively high cost. And so, while advisors shouldn’t ignore BTC funds like the GBTC, the average investor is likely to make only small investments into stock market BTC tracker funds. Until, that is, we get a full-fledged Bitcoin ETF — because that will be a game changer.

(Photo: Shutterstock)