What Is the Grayscale Bitcoin Trust?

The Grayscale Bitcoin Trust (GBTC) is a digital currency investment product that makes Bitcoin (BTC) available to individual and institutional investors. Unlike a direct investment in Bitcoin, which may require a deeper understanding of blockchain technology and cryptocurrency exchanges, GBTC offers a more traditional investment in the form of shares.

On Jan. 21, 2020, GBTC became a Securities and Exchange Commission (SEC) reporting company, registering its shares and making the trust the first digital currency investment vehicle to have this status. Still, GBTC has not yet received full SEC approval to convert into an exchange-traded fund (ETF) as of late 2023, but recent rulings provide reason to believe it may not be long before it can do so.

Understanding the Grayscale Bitcoin Trust

Grayscale Bitcoin Trust (GBTC) debuted in September 2013 as a private, open-ended trust for accredited investors. In 2015, it received FINRA approval to trade publicly, which meant that investors could buy and sell public shares of the trust under its ticker symbol, GBTC. The trust is solely and passively invested in BTC, enabling investors to gain exposure to BTC as a security while avoiding the challenges of buying, storing, and securing the bitcoins directly. Shares are designed to track the BTC market price, with fewer fees and expenses.

GBTC is traded publicly on the OTCQX, an over-the-counter (OTC) market, under the alternative reporting standard for companies not required to register with the SEC. Although the trust is not an ETF, GBTC says it's modeled on popular commodity investment products like the SPDR Gold Trust, a physically backed gold ETF. Grayscale is applying for full SEC approval to convert into an ETF.

How GBTC Works

GBTC operates as a closed-end unit trust and issues a fixed number of shares to investors in exchange for capital, which is then used to buy Bitcoin.

The trust holds a significant amount of actual bitcoins, and the price of its shares is meant to reflect the value of Bitcoin held per share. However, GBTC shares have frequently traded at a large premium or discount to the actual value of the underlying Bitcoin, known as its net asset value (NAV).

As of October 2023, GBTC had about $17.4 billion in assets under management and 692,370,100 shares outstanding. It charges an annual management fee of 2%.

Advantages and Disadvantages of GBTC

Advantages

One of the primary advantages of GBTC is its ability to provide simplified access to Bitcoin, especially for individuals unfamiliar with the ins and outs of cryptocurrency trading and digital wallets. Unlike direct investments in Bitcoin, which require a good understanding of blockchain technology and cryptocurrency exchanges, GBTC allows investors to trade shares in traditional brokerage accounts. This streamlined access can appeal to those seeking exposure to Bitcoin's price movements without learning the intricacies of cryptocurrency transactions.

As an investment vehicle trading over the counter, GBTC is available for investors to buy and sell in the same way as virtually any U.S. security. GBTC can be traded through brokerage firms and is also available within tax-advantaged accounts like individual retirement accounts or 401(k)s. This presents a potential tax benefit for investors, allowing them to gain exposure to Bitcoin in a tax-friendly manner, a significant advantage considering the capital gains tax implications of direct cryptocurrency investments​.

Another major advantage of GBTC is its security. Storing cryptocurrency safely is a notorious challenge, and Grayscale says its assets are safeguarded in line with the best industry standards. Investing in GBTC sidesteps the common security risks of cryptocurrency exchanges and wallet providers. These platforms are frequently targets for hackers, and many investors have lost funds from security breaches.

Disadvantages

However, GBTC has been the target of criticism. A notable downside of GBTC is that its shares at various points have traded at a significant premium or discount to its NAV. This discrepancy has meant that investors were paying far more or less than the actual worth of the Bitcoin represented by each share. The premium or discount can significantly impact the actual return on the investment.​

GBTC is also known for its high management fees (2%) compared with other pooled investment vehicles. The fee structure could erode returns, especially in a bear market, making it a less cost-effective option for investors looking to gain exposure to Bitcoin. The high fees are frequently cited as one of the main problems with GBTC when compared with other traditional investment vehicles or even prospective Bitcoin ETFs.

Shares in GBTC also come with less flexibility. Unlike a Bitcoin ETF, GBTC operates more like a closed-end fund, lacking the ability to create or redeem shares based on market demand. This structure can contribute to the premium or discount related to NAV and puts limits on the flexibility of investors and the fund manager. This can deter investors accustomed to the operational dynamics of ETFs, which allow for creating and redeeming shares to better align the share price with the value of the underlying assets.

Regulatory Issues

Regulatory concerns about GBTC largely stem from the SEC's cautious approach toward cryptocurrency-based financial products. In the meantime, GBTC has filed an application with the SEC for full ETF approval, which is pending.

The application was held up at the SEC, but a 2023 federal appeals court ruling mandated that the SEC review GBTC's application to convert its Bitcoin trust into an ETF. The court ruled that the SEC's initial denial of GBTC's proposal was improper because the SEC did not explain why GBTC should be treated any differently than Bitcoin futures ETFs which is a similar product that the SEC previously approved. GBTC argued that its proposed Bitcoin ETF was materially identical to the futures- and commodity-based ETFs. The appeals court ruled that the SEC's rejection of Grayscale's application was "arbitrary and capricious" since it did not explain why it was treating similar products differently. The ruling doesn't mean the SEC must approve GBTC's application, but it does quicken the pace for its eventual review.

The SEC has long voiced concerns about the lack of regulatory oversight in the spot cryptocurrency market, which has been its primary reason for denying crypto ETF applications. The regulator has maintained that the market needs adequate surveillance-sharing agreements to prevent market manipulation. The SEC's cautious stance is also mirrored by its treatment of other proposals to list Bitcoin investment products on national exchanges, all of which have been denied until recently.

Impact on GBTC's Value

The trust's shares have traded at a discount to NAV for extended periods because of this regulatory uncertainty, with the discount reaching almost 50% at one point. If the SEC were to approve the conversion of GBTC into a spot ETF, the discount to NAV could diminish, affecting the overall value and appeal of GBTC to investors​.

The regulatory maze surrounding GBTC's ETF conversion reflects broader concerns by regulators regarding investor protection, market manipulation, and the stability and maturity of the cryptocurrency market. As GBTC navigates this complex landscape, the outcome of its ETF application will set a significant precedent for how other cryptocurrency investments are treated.

The Bottom Line

GBTC provides a convenient way for investors to access Bitcoin without direct ownership. It's available to individuals and institutions through brokerage accounts, IRAs, and 401(k)s. GBTC offers simplified Bitcoin exposure but has downsides like high management fees and limited flexibility. Regulatory hurdles, driven by the SEC's concerns about cryptocurrency products, have delayed GBTC's conversion to a Bitcoin ETF, reflecting the evolving regulatory landscape in the crypto space.