What is Grayscale Bitcoin Trust (GBTC) and how does it work?

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Summary:

Grayscale Bitcoin Trust is a financial instrument that allows investors to trade stocks in trust funds that hold a large amount of Bitcoin.

The fund’s stock price tracks the price of Bitcoin, but it is not entirely consistent.

Grayscale also provides some other floor trading products, and the price will track the price of cryptocurrencies such as Ethereum, Bitcoin Cash and Litecoin.

What is Grayscale Bitcoin Trust (GBTC)?

There is a way to invest in Bitcoin in the stock market: Grayscale Bitcoin Trust (GBTC). This is one of several financial instruments that allow investors to trade stocks in trust funds holding large amounts of Bitcoin, and each stock is priced close to the price of Bitcoin.

As of October 2020, Grayscale Bitcoin Trust represents a private investment of $6.5 billion in Bitcoin assets. Grayscale is an American crypto investment company and one of the largest bitcoin buyers in the world. It launched the trust fund in September 2013. Its transaction code is “GBTC”.

According to data from Bitcointreasuries.org, Grayscale Bitcoin Trust holds 456,537 Bitcoins, accounting for 58% of the 786,059 Bitcoins held by listed companies.

Grayscale Bitcoin Trust Fund has made headlines many times due to its rapid development. On June 9, 2020, the trust fund held 384,953 bitcoins, increasing its holdings by approximately 70 in four and a half months. (Rhythm note, the original author made a calculation error here, and actually increased his holdings by about 70,000 in four and a half months)

Ethereum Grayscale will also use a large-scale advertising campaign in 2020 to encourage investors to invest in the trust and get itself on the headlines again.

How does Grayscale Bitcoin Trust work?

The working principle of Grayscale Bitcoin Trust is as follows:

Grayscale invites private wealthy investors to pledge funds to the fund for the purchase of large amounts of Bitcoin.

Then Grayscale listed the fund on a public stock exchange, which means that anyone can trade the stock.

The fund’s stock price tracks the price of Bitcoin, but it is not entirely consistent.

The fund’s shares can be traded at a premium or discount to the actual price of Bitcoin. Historically, they have almost always traded at a premium. This is good news for grayscale and its grayscale investors. They make money from this premium, but it is bad news for other investors.

So, why should investors buy shares of Grayscale Bitcoin Trust instead of buying Bitcoin directly? There are several reasons:

First of all, investing in a bitcoin trust fund allows people to access bitcoin without worrying about how to store bitcoin, whether it will touch the law or how to pay taxes.

If you want to buy Bitcoin, you have a lot of things you need to keep in mind at all times: how do you store it? Do you need to pay someone to keep your bitcoins? What if you lose your keys or your Bitcoin wallet is hacked? As a publicly listed trust company that reports to the U.S. Securities and Exchange Commission (SEC), Grayscale Bitcoin Trust Company allows you to ignore these issues.

Second, publicly traded Bitcoin trusts have various tax benefits. Certain brokerage and investor accounts such as IRA and Roth IRA will not give tax incentives to bitcoin investment, but will give tax incentives to publicly traded trust investments. Grayscale’s trust company provides those investors with Bitcoin exposure in a tax-friendly manner.

Third, crypto transactions are very isolated. You can’t use Bitcoin to trade with Tesla and Apple stocks (not using crypto stock derivatives platforms). This cuts off the connection between the encryption economy and the traditional economy. However, as long as you list Bitcoin on the stock exchange, despite the high price and limited quantity, traditional investors can invest in the crypto economy.

Ethereum Grayscale Bitcoin Trust is currently the largest trust fund among several publicly listed trust funds. As of October 2020, rival ETC Group’s bitcoin products have a market value of US$60 million, and Wisdom Tree’s bitcoin products have a market value of US$34.5 million.

In addition to the largest Bitcoin product, Grayscale also provides several other floor trading products. Its Ethereum Trust is the second largest product, managing $928 million worth of ETH. Other products include BCH, ETC, LTC, Stellar Lumens, XRP, Horizen and ZCash, as well as digital large-cap funds including BTC, ETH, XRP, BCH and LTC.

The future success of Grayscale Trust is far less secure. The shares of its competitors may be more representative of the price of Bitcoin than the shares of Grayscale, or they may charge lower fees.

Grayscale Bitcoin Trust vs Bitcoin ETF

In addition, the grayscale model benefits from the absence of Bitcoin ETFs or exchange funds in the market. To invest in Grayscale Bitcoin Trust, you are buying stocks in the trust; while using an ETF, you are investing in a fund that directly tracks the price of Bitcoin.

Bitcoin ETFs are currently not legal in the United States. The US Securities and Exchange Commission has rejected multiple Bitcoin ETF applications on the grounds that the price of Bitcoin can be manipulated. While American investors are waiting for a Bitcoin ETF (the SEC may never approve), Bitcoin Trust is the next best option.