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What is the Bitcoin Investment Trust?

September 29, 2020 · 7 minute read

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What is the Bitcoin Investment Trust?

Want to invest in Bitcoin, but don’t want to go through the trouble of setting up a digital wallet or buying and selling bitcoin directly?

The Grayscale Bitcoin Investment Trust (GBTC) gives qualified investors access to Bitcoin through an investment product they can buy and sell in their brokerage accounts.

But before investing, individuals should be sure they understand who can invest in the GBTC and what the pros and cons of investing are.

Some Background on Bitcoin

Bitcoin was the first major cryptocurrency ever developed, appearing over a decade ago in 2009. The developer’s true identity is unknown, but is represented by the pseudonym Satoshi Nakamoto, which may represent multiple people involved.

Bitcoin is a decentralized digital currency. It exists only online and is not held by any bank or clearing house. As a result, transaction fees for the currency tend to be much lower than they would be for currencies that are directed through traditional banks.

Bitcoin can be purchased using any currency on cryptocurrency exchanges and is then stored and sent through a digital wallet. What makes Bitcoin really special, though, is its use of blockchain technology, which produces a kind of transparent public record of all bitcoin transactions sent between digital wallets. This list verifies the integrity of each transaction ensuring that it is secure.

One important thing to understand about Bitcoin is that the supply is limited. They are “mined” by a network of miners whose personal computers solve complex mathematical problems. When a miner solves a problem, they earn bitcoins.

Bitcoin is currently accepted by some retailers, though it is not yet widely accepted. For now, it also remains largely unregulated by governments around the world. This status may change in the near future, and the ramifications of regulation are not yet known.

Investing in Bitcoin?

Traditionally, individuals can invest in Bitcoin by exchanging U.S. dollars or other foreign currency on a cryptocurrency exchange. They may also be able to purchase cryptocurrencies like Bitcoin through banks or at various cryptocurrency ATM locations around the world.

There are no mutual funds or ETFs that invest in cryptocurrencies at the moment, but the closest thing that allows investors to invest indirectly in Bitcoin is the Grayscale Bitcoin Investment Trust.

What is the Grayscale Bitcoin Investment Trust?

The Grayscale Bitcoin Investment Trust is the only bitcoin fund on the market. It is an open-ended grantor trust, which allows the sponsoring company to own only one type of investment, in this case Bitcoin.

It’s important to understand that the GBTC is not a common stock that allows investors to purchase shares of a company. Rather, when investors buy shares of an investor trust, they enter into a contract that entitles them to partial ownership of the assets held by the trust.

In the case of the GBTC, each share of the trust is worth about 1/1000 of a bitcoin. As of early 2020, there were more than 292 million outstanding shares of the GBTC, representing roughly 292,000 bitcoins.

What Is Grayscale?

Grayscale is the sponsoring company of the GBTC. The company was established in 2013 and is the largest digital currency asset manager.

It offers a suite of investment products that provide investors with access to the cryptocurrency market through single-asset and diversified products. Examples of other single-asset products that trusts can invest in include Ethereum, Litecoin, and Ripple.

In 2019, the company raised more than $607 million in all of its investment products, bringing the total investment since inception to more than $1 billion.

By the end of December 2019, Grayscale managed about $2 billion in assets across its 10 product offerings.

Grayscale is a subsidiary of Digital Currency Group, which buys, invests in, and builds cryptocurrency companies around the world. Digital Currency Group also owns CoinDesk, a leading source of blockchain news and research, and Genesis, a full-service trading firm focused on digital currencies.

Who can invest in the Bitcoin Investment Trust?

Investment in the GBTC is only open to institutional and qualified accredited investors, which limits the number of people who are able to invest in it.

To become an accredited investor in Grayscale, an individual must have an annual income of $200,000, or $300,000 for married couples, for the past two consecutive years.

They must also be able to show that that level of income is likely to continue. Alternatively, individuals with a net worth of more than $1 million may be considered accredited investors.

Why is this company only open to accredited investors? In order for a security to be sold to the public, it must meet a number of criteria from the Securities and Exchange Commission (SEC) .

Alternatively, it must meet certain criteria for exemptions. Selling only to accredited investors is one of these exemptions. The SEC assumes that accredited investors are experienced with capital markets and don’t need to be held to the same standards as everyday investors.

Accreditation effectively acts as a barrier to entry protecting the general public from complex and potentially risky investments.

In 2019, the majority—71%—of investors in Grayscale’s offerings were institutional investors, which are typically large institutions like banks, hedge funds, and insurance companies that pool investor money to buy assets.

The GBTC Is an SEC Reporting Company—What Does that Mean?

As of January 21, 2020, the GBTC became the first digital currency to become an SEC reporting company. Technically speaking, this means that it will comply with all obligations under the Exchange Act , including filing quarterly and annual reports and financial statements with the SEC as 10-Qs and 10-Ks, and filing current reports on Form 8-K. All reports filed with the SEC are viewable to the general public on the SEC EDGAR website, making the inner workings of the trust more transparent.

In addition to its new filing status, accredited shareholders who purchased shares from the trust’s private placement will have an earlier liquidity opportunity, as the statutory holding period for those shares was reduced from 12 months to six months.

For now, the trust is still limited to accredited investors, but in the future, the trust’s status as an SEC reporting company could help open it up to investors who are now restricted from buying shares.

What Is the Bitcoin Investment Trust Premium?

When individuals buy shares of the GBTC, they are not buying Bitcoin directly. As a result, the price of the trust’s shares may be higher or lower than the price of the value of the underlying bitcoins, also known as net asset value (NAV).

When the market value of shares of the GBTC is higher than NAV, shares are trading at what is known as a premium. And due to relatively high demand and low supply, shares of the trust may trade at a high premium.

Check the GBTC’s premium on the Grayscale website by comparing market price per share with Bitcoin price per share.

Because the market for Bitcoin is by nature volatile, the added premium can be a tricky factor for investors to contend with. Consider that buying shares of the GBTC at a high premium can be more risky than buying Bitcoin itself.

That’s because if the price of Bitcoin plummets, the size of the premium can shrink, adding to losses. Conversely, if you buy shares at a relatively low premium or even discount and the price of Bitcoin goes up, gains may be magnified.

Investors who understand the premium may be able to use it to get an idea of where the market is headed. A rising premium relative to NAV suggests a bullish market or that shares may be becoming overbought. As decreasing premium relative to NAV can suggest a bearish market.

Why Buy Shares of the Bitcoin Investment Trust?

While the GBTC may be a bit of a complicated investment, there are a number of reasons investors might choose to purchase shares over investing directly in Bitcoin. Here’s a look:

Ease

When one invests in Bitcoin, or any digital currency, they must invest outside of regular stock exchanges, like Nasdaq or the New York Stock Exchange . Rather, you must invest on cryptocurrency exchanges that allow investors to convert U.S. dollars and foreign currencies to cryptocurrency.

These exchanges may set limits on how much you can buy on a given day. On the other hand, qualified investors can buy shares of GBTC on the open market, and there are no limits to how much they can buy.

No Need to Worry About Storage

Investors must set up a digital wallet that will hold their cryptocurrencies outside of normal banking and brokerage accounts. When investors own and store cryptocurrencies themselves, they must worry about keeping their private keys—the information that gives them access to their bitcoins—safe from loss and theft.

Shares of GBTC can be held in an investor’s regular brokerage account, and Grayscale is in charge of keeping the underlying bitcoins safe.

Retirement Accounts

Investors may be able to hold shares of GBTC in their tax advantaged retirement accounts such as IRAs and 401(k)s depending on the rules of the account.

GBTC Is a Titled Security

Similar to other types of securities such as stocks and bonds, shares of the GBTC are titled securities. Financial advisors, tax professionals, and estate planners are able to easily recognize and work with this type of investment. And they are easily passed on to heirs under estate planning laws.

What Are the Cons of Buying GBTC?

While there may be good reasons to buy shares of the GBTC, there might also be reasons to heed caution.

Fees

The Bitcoin Trust charges a 2% fee to pay for administration of the fund and for keeping the bitcoins it holds safe. The fee accrues daily, which means that the value of the trust diminishes over time.

Potential Competition

At the moment, the GBTC is the only Bitcoin fund on the market. As a result, there is no competition to put pressure on prices. But if another Bitcoin stock were to hit the market, demand for GBTC could fall and prices could drop as well.

Trading Constraints

Because the GBTC trades on the open market, you can only make trades when the markets are open.

On the other hand, cryptocurrency markets are open at all times. Big changes in the cryptocurrency market can happen over the weekend or during holidays, but investors in GBTC can’t react to them until the markets are open again.

Is Bitcoin the New Gold?

In early May 2019, Grayscale launched their #DropGold campaign to promote Bitcoin as an alternative to holding gold in a portfolio.

Gold is often held in portfolios as a hedge against inflation. That’s because gold does a pretty good job holding its value over time. And while the spending power of the US dollar may decrease, the value of gold may hold steady. In fact, when the value of the dollar decreases, gold prices tend to go up.

According to Grayscale, Bitcoin may represent a viable alternative to gold as a value-holding asset and hedge. They argue that, like gold, Bitcoin is scarce and verifiable. However, Bitcoin is cheaper to store and transport, it allows for swift transactions, cannot be counterfeit, and is not subject to government controls.

As the world’s largest cryptocurrency asset manager, Grayscale has a vested interest in investors adopting Bitcoin over a traditional investment like gold—but they may face an uphill battle doing so. In early 2020, Bitcoin’s market cap was about $170 billion—that’s the value of all the Bitcoin in the world.

The gold market has a market cap of $7 trillion, so Bitcoin has quite a bit of ground to make up before rivaling the value of gold. Perhaps more importantly, Bitcoin’s future viability depends on government regulation and users adoption of the technology.

Bitcoin for the Average Investor

For the average investor who’s not accredited, shares of the GTBC remain out of reach for now. Investors interested in adding cryptocurrency to their portfolios can do so by buying Bitcoin, Litecoin, and Ethereum through SoFi Invest®.

Ready to learn more about building your cryptocurrency portfolio? Visit SoFi Invest.


SoFi Invest®
The information provided is not meant to provide investment or financial advice. Investment decisions should be based on an individual’s specific financial needs, goals and risk profile. SoFi can’t guarantee future financial performance. Advisory services offered through SoFi Wealth, LLC. SoFi Securities, LLC, member FINRA / SIPC . The umbrella term “SoFi Invest” refers to the three investment and trading platforms operated by Social Finance, Inc. and its affiliates (described below). Individual customer accounts may be subject to the terms applicable to one or more of the platforms below.

Crypto: Bitcoin and other cryptocurrencies aren’t endorsed or guaranteed by any government, are volatile, and involve a high degree of risk. Consumer protection and securities laws don’t regulate cryptocurrencies to the same degree as traditional brokerage and investment products. Research and knowledge are essential prerequisites before engaging with any cryptocurrency. US regulators, including FINRA , the SEC , and the CFPB , have issued public advisories concerning digital asset risk. Cryptocurrency purchases should not be made with funds drawn from financial products including student loans, personal loans, mortgage refinancing, savings, retirement funds or traditional investments.
Investment Risk: Diversification can help reduce some investment risk. It cannot guarantee profit, or fully protect in a down market.
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