Grayscale Bitcoin Trust (GBTC)

What is Grayscale Bitcoin Trust (GBTC)?

Grayscale Bitcoin Trust (GBTC) is a digital financial product created to provide cryptocurrency enthusiasts exposure to the Bitcoin market without directly purchasing the asset.

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Functioning as a passive shares investment vehicle, GBTC holds a substantial amount of Bitcoin on behalf of its investors.

Techopedia Explains

The Trust’s value is directly linked to Bitcoin’s performance, with each share representing a specific quantity of the cryptocurrency.

The financial product is actively traded on the over-the-counter (OTC) market and employs reputable custodians to store Bitcoin holdings securely. This provides additional security and assurance for its retail and institutional investors.

On January 21, 2020, Grayscale Bitcoin Trust attained the status of a Securities and Exchange Commission (SEC) reporting company.

This significant achievement involved the formal registration of GBTC’s shares with the SEC, making it the inaugural digital currency investment vehicle to receive such recognition.

In 2021, an application was made to convert GBTC to an exchange-traded fund (ETF). After a series of rejections due to customer protection and market manipulation concerns, the fund was officially approved and uplisted as an ETF on January 10, 2024.

GBTC remains a notable option for investors seeking regulated and easily accessible participation in the price movements of Bitcoin within the traditional financial market landscape.

Who Owns Grayscale Bitcoin Trust?

Grayscale Bitcoin Trust was founded by Digital Currency Group (DCG). DCG is a global investment firm with a primary focus on digital assets and blockchain technology.

Silbert, a prominent figure in the crypto space, established DCG in 2015 as a platform to incubate, invest in, and acquire companies within the digital currency sector.

Recognizing the increasing demand for investment products that would provide traditional investors with exposure to digital assets, particularly Bitcoin, Silbert initiated the formation of Grayscale Investments.

GBTC was officially launched in September 2013 as a private, open-ended trust catering initially to accredited investors. Accredited investors possess the necessary financial qualifications to engage in investment opportunities not available to the general public.

The transition from a private, accredited investor-focused trust to a publicly traded entity was a strategic decision to create accessibility and enable more investors to participate in the potential benefits of Bitcoin.

History of Grayscale Bitcoin Trust

Here are the major historical milestones of Grayscale Bitcoin Trust since its inception:

Year Event
2013 Grayscale Investments launched GBTC as a private, open-ended trust for accredited investors.
2015 GBTC received approval from FINRA to trade publicly on the OTC markets, making it accessible to a broader range of investors.
2020 In January, GBTC becomes an SEC reporting company, registering its shares and becoming the first digital currency investment vehicle to have this status.
2021 GBTC faced challenges as its premium over Net Asset Value (NAV) turned negative. This caused a decline in investor interest.

Grayscale temporarily halts new fund creation. Grayscale announced plans to convert GBTC into an exchange-traded fund (ETF), seeking regulatory approval for the transformation.

2022 SEC rejected the Grayscale Investment application to convert its $13.5 billion Grayscale Bitcoin Trust ($GBTC) into ETFs.

Grayscale Investment company announced that it had filed a lawsuit against the SEC, requesting a petition for a review.

2023 D.C. Circuit Court of Appeals ordered the SEC to scrap its rejection of the GBTC spot Bitcoin ETF application and scheduled a re-review.

Grayscale filed an S-3 form registration statement with the SEC to list the shares of GBTC on the New York Stock Exchange (NYSE) Arca.

January 2024 Grayscale Investment submitted an amended application for spot Bitcoin ETF.

SEC officially approved and uplisted GBTC as an ETF.

How Does Grayscale Bitcoin Trust Work?

Grayscale Bitcoin Trust functions by tracking the price of Bitcoin through the XBX index, published by TradeBlock. This index serves as the benchmark for assessing GBTC’s performance.

Accredited investors can buy GBTC shares directly at the net asset value (NAV). The NAV represents the market value of the share.

After a 6-month lockup period, investors can retain or sell their shares to retail investors on the secondary market.

Shares on the secondary market, identifiable by the ticker symbol GBTC, often trade at a premium based on investor demand.

For example, during significant increases in Bitcoin’s price, there is generally higher demand for GBTC shares, leading to an increase in their price.

Many investors, including retail and some institutions, prefer accessing Bitcoin through public markets, and GBTC provides a regulated and accessible avenue for them to do so.

The structure of the secondary market, with its premium pricing influenced by demand, reflects the interest and demand for Bitcoin exposure within the broader investment community.

How to Buy Shares of Grayscale Bitcoin Trust?

To purchase shares of Grayscale Bitcoin Trust, accredited investors can follow these straightforward steps:

  1. Open a Brokerage Account: Begin by opening a brokerage account with a reputable platform such as Fidelity Investments, Charles Schwab, TD Ameritrade, Robinhood, or SoFi Invest.
  2. Deposit Funds: Ensure your brokerage account is funded with the necessary capital to cover the purchase of GBTC shares.
  3. Search for GBTC and Place an Order: Utilize the platform’s search function or trading interface to locate GBTC. Specify the desired number of trust shares you wish to buy and proceed to place a buy order.
  4. Verification: Review and confirm the order details, including the quantity of shares and the total cost. Once satisfied, click “Submit” to execute the purchase order. The brokerage platform will provide a notification upon completion of the transaction.
  5. Track Your Investment: Keep tabs on your GBTC investment by regularly checking your brokerage account. Monitor its performance and be aware of any fluctuations in the premium over net asset value.

Advantages of Grayscale Bitcoin Trust

Below, we explore the diverse advantages offered by Grayscale Bitcoin Trust:

Advantages Description
Indirect Exposure to BTC GBTC allows investors to gain exposure to Bitcoin’s price movements without directly owning the cryptocurrency.
Accessibility Investors can trade GBTC on traditional stock exchanges during regular market hours. This provides ease of access and flexibility.
Traditional Finance Product GBTC serves as a familiar investment vehicle for traditional investors seeking exposure to the cryptocurrency market.
Liquidity GBTC shares are traded on stock exchanges, providing liquidity for investors to buy or sell at various market prices.
Reputable Management GBTC is managed by Grayscale Investments, a reputable firm that provides digital asset management for retail and institutional investors.
Fractional Ownership GBTC shares allow for fractional ownership, enabling investors to buy and sell smaller increments of Bitcoin.
No Crypto Wallet Required Investors can participate in the crypto market without the need for a digital wallet. This takes away the concern of securing and managing private keys.
Tax-Efficient Trading GBTC’s structure may offer tax advantages compared to directly owning and trading bitcoin.

Drawbacks of Grayscale Bitcoin Trust

Grayscale Bitcoin Trust offers investors exposure to Bitcoin; however, it comes with certain drawbacks that should be carefully considered:

Drawbacks Description
Annual Management Fee GBTC charges an annual management fee of 2.5%. While this may look little, it reduces investors’ overall returns for the year over time.
Market Price The market price of GBTC may not accurately track the spot price of Bitcoin due to premium/discount fluctuations and other factors.
Fear of Bankruptcy If Grayscale Investment files for bankruptcy, GBTC holders may face delayed withdrawal.

What Other Investment Products Does Grayscale Offer?

Grayscale extends its offerings to investors through similar trusts that track various cryptocurrencies and offer different investment objectives.

  • Grayscale Ethereum Trust (ETHE):
    Provides exposure to Ethereum’s price movements
    Annual fee: 2.5%
  • Grayscale Bitcoin Cash Trust (BCHG):
    Tracks the price of Bitcoin Cash
    Annual fee: 2.5%
  • Grayscale Ethereum Classic Trust (ETCG):
    Offers exposure to Ethereum Classic
    Annual fee: 3.0%
  • Grayscale Horizon Trust:
    Diversified investment trust
    Annual fee: 2.5%
  • Grayscale Litecoin Trust (LTCN):
    Tracks the price of Litecoin
    Annual fee: 2.5%
  • Grayscale Stellar Lumens Trust:
    Provides exposure to Stellar Lumens (XLM)
    Annual fee: 2.5%
  • Grayscale Zcash Trust:
    Tracks the price of Zcash (ZEC)
    Annual fee: 2.5%

Is BITO or GBTC Better?

The ProShares Bitcoin Strategy ETF (BITO) was created by ProShares, an investment management company that creates ETFs. ProShares launched BITO to expose investors to Bitcoin through a financial instrument traded on traditional stock exchanges.

However, choosing between BITO (ProShares Bitcoin Strategy ETF) and GBTC depends on an investor’s preferences, risk tolerance, and investment goals.

Nevertheless, each has its own set of advantages and considerations, which we compare below:

Key Differences BITO GBTC
Structure BITO is an exchange-traded fund (ETF) that directly holds bitcoin futures contracts rather than physical bitcoin. GBTC is a traditional finance share linked with BTC. This flagship product indirectly allows investors to gain exposure to the asset, as it holds physical Bitcoin rather than futures contracts.
Fees BITO has a management fee ratio of 0.95%. GBTC has an annual management fee of 2%, which can impact overall returns. Investors should consider the fee structure when evaluating the cost of holding GBTC.
Trade As an ETF, BITO can be traded during traditional market hours on stock exchanges, giving investors more flexibility regarding when they can buy or sell. GBTC often trades at a premium or discount to its NAV, which fluctuates based on BTC price trajectories.
Tax ETFs like BITO are generally considered more tax-efficient than trusts. Investors may benefit from lower tax implications when compared to GBTC. GBTC’s structure may have higher taxes due to its price connection to BTC.

Major Consideration

  • Investor Preference: Some investors prefer the direct ownership of physical bitcoin, which GBTC offers, while others may find BITO’s futures-based approach more suitable.
  • Tax Implications: Understanding the tax implications of each investment is crucial. ETFs like BITO may offer reduced taxes compared to GBTC. Nevertheless, investors should consult tax professionals for financial advice.
  • Market Conditions: The digital asset market can be volatile, and the performance of these instruments may vary based on market conditions.

The Bottom Line

Grayscale Investment’s GBTC creates an investment pathway to gain exposure to Bitcoin’s price movements without directly owning the asset.

With the recent approval of GBTC to trade as an ETF, the price of BTC can potentially skyrocket and generate high returns for the fund holders.

However, it is important to stay informed about market conditions and consider preferences before making investment decisions involving GBTC.

FAQs

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Jimmy Aki

A graduate of the University of Virginia and now based in the UK, Jimmy has been following the development of blockchain for several years, optimistic about its potential to democratize the financial system. Jimmy's previously published work can be found on BeInCrypto, Bitcoin Magazine, Decrypt, EconomyWatch, Forkast.news, Investing.com, Learnbonds.com, MoneyCheck.com, Buyshares.co.uk and a range of other leading media publications. Jimmy has been investing in Bitcoin himself since 2018 and more recently in non-fungible tokens (NFTs) since their boom in 2021, with expertise in trading, crypto mining and personal finance. Alongside writing for Techopedia, Jimmy is also a trained economist, accountant and blockchain…