It was a tough year and things have changed since then Bitcoin (BTC 0.30%) peaked in 2021. The leading cryptocurrency is down 59% over the past year and has seen a 73% decline since hitting an all-time high just 14 months ago. The implosion of several high-profile digital currency exchanges and platforms has shaken traders’ confidence, but the chaos may present an opportunity.
What if I told you that you could buy a position in Bitcoin at a 38% discount? And – no – this isn’t some cruel hoax, where the trick is to simply wait a few months for the denomination itself to become cheaper. The crypto market has shown some signs of stabilization here. Bitcoin is actually trading slightly higher over the past week as well as the past month.
I’m talking about an opportunity where you can buy $15.94 worth of Bitcoin for less than $10, but — and there’s always a “but” — there’s a catch that might very well put you off.
Image source: Getty Images.
It’s a matter of trust
A handful of exchange-traded funds have launched in the past 15 months, but they’re far from perfect. They do not own Bitcoin themselves and instead rely on digital currency futures contracts to participate in the ups and downs of the crypto market. However, Grayscale Investments — a player in the crypto market since its inception a decade ago — operates a few publicly traded trusts that are direct owners of the underlying crypto.
Grayscale Bitcoin Trust (GBTC -2.94%) is its largest offering and currently holds more than $11 billion in Bitcoin. Unlike the newer cryptocurrency ETFs, Grayscale’s entry is established as an investment trust. It actually owns the crypto. After seeing FTX, Celsius, Travellerand other exchanges are collapsing after taking big risks to earn some bonus returns, it is reassuring to know that Grayscale Bitcoin Trust is storing its assets offline in cold storage.
As previously mentioned, Grayscale Bitcoin Trust trades at a discount of 38% to its net asset value. The publicly traded trust closed Tuesday at $9.88, a 38% discount to the $15.94 per share it owns in cold-store Bitcoin assets. As they always say, if it seems too good to be true, you’re probably right.
For starters, there is a price to pay for Grayscale’s direct purchase, storage, and safekeeping of Bitcoin. The management fee is 2% annually and, like most ETFs and mutual funds, is charged in small amounts throughout the year. Many of the futures-based ETFs that don’t trade at significant discounts to their assets have lower sponsorship fees. To make matters worse, that fee is charged on the company’s current $11 billion in assets under management, not the discounted market value of the shares.
The biggest catch: You can’t cash out the value of the trust’s bitcoin. You board or disembark at the valid reduced fare. And – spoiler alert – it’s a discount that has historically widened rather than contracted.
Grayscale Bitcoin Trust consistently traded at a premium three years ago when it was one of the few publicly traded ways to capitalize on the Bitcoin boom. In late 2021, as Bitcoin neared $65,000, the trust was trading at a discount in the teens. It’s much deeper now.
A silver lining is that the discount can also shrink, which we’ve seen over the past few weeks as Bitcoin’s price began to stabilize. Grayscale Bitcoin Trust is up 23% over the past month, with Bitcoin itself up just 2% over that time. This is of course not the norm. As mentioned, the double-digit discount was widening at the time, even as Bitcoin hit all-time highs in 2021.
There is no free lunch. However, if you think bitcoin will rally — and you understand the risks involved with freely trading trusts earning varying premiums and discounts on the underlying assets — this is an avenue to consider. Grayscale Bitcoin Trust offers crypto investments at a theoretical discount but at a hefty annual sponsorship fee.
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