As the popularity of Bitcoin continues to grow, investors are seeking ways to diversify their portfolios by gaining exposure to it.
Some may choose to hold Bitcoin themselves by purchasing it on an exchange and storing it on a wallet of their own.
Others who are used to more traditional way of investing, like stocks and bonds, may prefer to purchase shares in an investment vehicle that owns and holds the Bitcoin for them.
One of the most popular of these traditional investment vehicles is the Grayscale Bitcoin Trust (GBTC).
This means GBTC owns Bitcoin, and you simply buy shares of GBTC which represent real bitcoins.
In this article, we will delve into the key differences between investing directly in Bitcoin and investing in GBTC, examining factors like:
|Accessibility||Accessible through traditional brokerage accounts||Requires signing up for a cryptocurrency exchange (and possibly self-custody)|
|Fees||2% annual management fee||Transaction fees vary depending on the exchange, market conditions, and transaction size|
|Premium or Discount||GBTC shares may trade at a premium or discount to the underlying Bitcoin value||Market price closely reflects the actual value of Bitcoin|
|Security and Storage||Grayscale Investments is responsible for security and storage||Investors are responsible for the security and storage of their digital assets (unless held on an exchange)|
|Tax Implications||GBTC shares are subject to capital gains taxes; can be held in tax-advantaged accounts||Subject to capital gains taxes; mining may be considered taxable income|
|Regulatory Risks||Subject to SEC oversight||Operates outside of traditional financial systems; not subject to the same level of regulatory oversight|
Grayscale Bitcoin Trust (GBTC) is an investment product offered by Grayscale Investments, a digital currency asset management company owned by Digital Currency Group.
The Grayscale Bitcoin Trust buys and holds bitcoin as an underlying asset that it issues shares against.
It thereby provides investors exposure to Bitcoin’s price movements without the need to buy, store, or manage the cryptocurrency directly.
GBTC is structured as a private trust, and its shares are publicly quoted on the OTCQX market under the symbol “GBTC.”
Unlike Bitcoin, one cannot send and receives shares of GBTC without intermediaries.
Bitcoin is the first and most well-known cryptocurrency, created in 2009 by an anonymous person or group known as Satoshi Nakamoto.
Users can send and receive bitcoins directly without the need for intermediaries, such as banks or payment processors.
GBTC: As a publicly quoted investment product, GBTC shares can be bought and sold through traditional brokerage accounts.
This makes it accessible to a wider range of investors, including those who may not have the technical expertise or desire to buy and manage Bitcoin directly.
Bitcoin: Purchasing Bitcoin directly requires signing up for a cryptocurrency exchange and going through a somewhat thorough KYC process - depending on the country you live in.
Additionally, users can and should set up a digital wallet they control and manage the private keys of that wallet.
This process can be daunting for less tech-savvy investors or those unfamiliar with the intricacies of cryptocurrency management.
GBTC: Grayscale charges an annual management fee of 2% for GBTC.
This fee covers the cost of managing the trust, including security and storage of the underlying bitcoins.
It’s worth noting that this fee is higher than the fees associated with many traditional ETFs or index funds.
Bitcoin: When buying Bitcoin directly, investors typically pay transaction fees to the cryptocurrency exchange.
These fees can vary depending on the exchange, market conditions, and the size of the transaction.
Additionally, investors may incur fees for transferring and storing bitcoins in their digital wallets.
GBTC: Grayscale Investments is responsible for the security and storage of the bitcoins held by the trust.
This means that investors don’t have to worry about managing private keys or finding secure storage solutions for their digital assets.
But it also means they must trust Grayscale not to run off with the money or take investing bets with it.
This is not as safe as you might think, and you will find out why in the section entitled ‘Disclaimer on GBTC’ below.
Bitcoin: Investors who buy Bitcoin directly must take responsibility for the security of their digital assets.
This can include setting up a digital wallet, managing private keys, and finding secure storage solutions.
However, this comes with some benefits as you can use the bitcoin as collateral, use it to purchase items, and be sure no one is going to steal it.
GBTC: GBTC shares have historically traded at either a steep premium or discount to the underlying net asset value (NAV) of the Bitcoin held by the trust.
This means the price of GBTC shares and the actual value of the underlying Bitcoin are almost never equal.
Investors should be aware that they may be paying more or less than the current value of Bitcoin when buying or selling GBTC shares.
Trying to play arbitrage with these differences in price has destroyed many companies, such as BlockFi, who attempted to create lending practices based on it, so beware.
(A) large revenue driver for BlockFi before this year was a popular arbitrage trade leveraging an investment vehicle called Grayscale Bitcoin Trust. For years, GBTC traded at a premium relative to the value of underlying bitcoin. Investment firm Grayscale let institutional investors contribute bitcoin to the trust in return for shares. The shares could eventually be sold to profit from the difference between their price and bitcoin. At one point, BlockFi held over 5% of the trust’s shares.
That strategy began to unravel in February 2021 when GBTC shares began selling at a discount, while a portion of BlockFi’s holdings were locked up by an SEC rule that prohibited holders from selling their GBTC until six months after their purchase.
This turned the profitable arbitrage into a money loser, leading to big losses for BlockFi.
Bitcoin: When purchasing Bitcoin directly, investors typically pay the market price plus a very small, one-time fee to the exchange which varies from exchange to exchange and the amount purchased (larger purchases require a smaller percentage fee).
GBTC: GBTC shares are considered a security for tax purposes, and any gains or losses from the sale of GBTC shares are subject to capital gains taxes.
This may be beneficial for investors looking to utilize tax-advantaged accounts like IRAs or 401(k)s. However, GBTC is not the only way to get exposure to Bitcoin through your IRA or 401k. There are many providers, such as BitcoinIRA.com.
Bitcoin: Holding Bitcoin directly may have different tax implications, depending on the jurisdiction and the investor’s specific circumstances.
Generally, the sale or exchange of Bitcoin is subject to capital gains taxes, and mining activities may be considered taxable income. In the USA, you cannot use IRA or 401K funds to buy bitcoin directly.
Investors should consult a tax professional to understand the specific tax implications of holding Bitcoin directly.
GBTC: As a regulated investment product, GBTC is subject to oversight by the Securities and Exchange Commission (SEC).
This provides a level of regulatory protection for investors, ensuring compliance with securities laws and regulations.
Bitcoin: Bitcoin, as a decentralized cryptocurrency, operates outside of traditional financial systems and is not subject to the same level of regulatory oversight - mostly because there is no one to hold accountable.
This can lead to increased risks, such as the potential for fraud, hacking, or other malicious activities.
However, there is a much lower risk of an exit scam in the case of holding your own Bitcoin. See FTX.
Following the collapse of the FTX crypto exchange run by Sam Bankman Fried, a number of exchanged began to publish ‘proof of reserves’. In essence, these proofs were meant to reassure various customers of these exchanges that they still had the deposits of their customers in hand - unlike FTX.
One notably absent crypto firm from the list was Grayscale Bitcoin Trust, owned by Barry Silbert’s Digital Currency Group.
Silbert claimed that the reason DCG would not be providing a proof of reserves stemmed from security concerns.
“Due to security concerns, we do not make such on-chain wallet information and confirmation data publicly available through a cryptographic Proof-of-Reserve, or other advanced cryptographic accounting procedure….(P)anic sparked by others is not a good enough reason to circumvent complex security arrangements” - Barry Silbert
This was highly unusual since proving reserves is not generally considered to be security risk.
This was made all the more concerning when Cameron Winklevoss, co-CEO of the Gemini crypto exchange, pointed out in an open letter to DCG,
“We are learning more by the day, but at present, the basic events as we understand them are as follows: (DCG’s subsidiary) Genesis lent $2.36 billion of assets to 3AC, a Singapore-based hedge fund that went belly up in June 2022.
After collateral was liquidated, Genesis indicated that it was left with a loss of at least $1.2 billion. At this point, Barry Silbert had two legitimate options: restructure the Genesis loan book (inside or outside of bankruptcy court) or fill the $1.2 billion hole. He did neither.” - Cameron Winklevoss
While there is no conclusive proof that Grayscale Bitcoin Trust does not possess all reserves, buyer beware.
In summary, the primary differences between investing in GBTC and Bitcoin directly relate to accessibility, fees, pricing, security, storage, tax implications, and regulatory risks.
GBTC offers a convenient and accessible way for investors to gain exposure to Bitcoin’s price movements, without the need to buy, store, or manage the cryptocurrency directly.
However, this comes with higher fees, potential discrepancies in pricing, and reliance on Grayscale Investments for security and storage.
On the other hand, investing directly in Bitcoin may offer more control over the digital asset and lower fees, but it requires a greater level of technical expertise and personal responsibility for security and storage.
Investors should carefully consider these differences and their individual risk tolerance when deciding whether to invest in GBTC or Bitcoin directly.