Grayscale Bitcoin Trust (OTC: GBTC ) has regularly made headlines over the past few weeks. The trust recently pushed Bitcoin (CRYPTO: BTC ) to a new record low relative to the contagion caused by one of the largest cryptocurrency exchanges, FTX, declaring bankruptcy. With GBTC trading at a discount, investors can see this as an opportunity. Famous investor Cathie Wood did. His firm, Ark Invest, recently bought another $1.4 million, bringing the total number of shares to 6.357 million. But before you decide whether to follow Wood’s investment strategy, it might be helpful to understand how a Trust works and how it differs from owning Bitcoin. Grayscale Bitcoin Trust was founded in 2013 and is designed for investors who want exposure to Bitcoin without actually owning the asset. Investors buy Trust shares on the exchange and Grayscale owns the actual Bitcoin. It’s important to know that the Grayscale Bitcoin Trust owns Bitcoin, but to really understand why the Trust trades at a discount, you need to understand the dichotomy between a trust and an exchange-traded fund (ETF). Grayscale Bitcoin Trust is currently valued at around $10.3 billion and holds 643,572 bitcoins. As a trust (and not an ETF), Grayscale cannot actively control the value of Bitcoin relative to the number of shares bought or sold by investors. When investors buy or sell Trust shares, Grayscale doesn’t immediately turn around and buy or sell Bitcoin. For the most part, Grayscale hopes that the free market values Trust shares close to the value of its Bitcoin holdings. But recently it failed.
Since the beginning of the year, Grayscale Bitcoin Trust has been trading at a discount as more investors buy back their shares and Grayscale still holds about the same number of Bitcoins. However, for most of its history, GBTC has traded at a premium, meaning that the value per share is worth more than the value of the Bitcoin held by Grayscale due to increased investor appetite for exposure to Bitcoin. If the trust were an ETF, the price would more closely track the value of Bitcoin, thus closing these gaps and balancing the share price and the value of Bitcoin on a more consistent basis. Should you follow Wood’s lead? If there is a true balance, the price per share should be around $15. You may think that this provides a profitable opportunity. If this loophole closes, investors will be able to make a profit of around 40% per share, in addition to the possibility that Bitcoin’s value will continue to increase in the future. This is probably part of the reason why Wood recently bought more shares of the Trust. He and his team may see the discount as another reason to buy and potentially increase their profits, but no one knows. Their rationale may also relate to the possibility that the Trust may become an ETF in the future. So far, Grayscale’s efforts to become an ETF have been stymied by the Securities and Exchange Commission (SEC). Optimists believe that it is likely only a matter of time before Grayscale receives this approval as investor demand for exposure to Bitcoin increases. If the SEC gives Grayscale the green light to become an ETF, that price gap should close later. If you want exposure to Bitcoin, the best way to do so would be to buy Bitcoin itself. With this, you have complete control over your Bitcoin and can do whatever you want with it. However, if you’re willing to take a little extra risk for an extra 40% chance of growth, GBTC is worth considering.
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