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.