What is the Grayscale Bitcoin Trust?

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Robert has reported for a variety of international publications including the Associated Press, The Guardian, Vice, and Decrypt. Current areas of interest include the political economy of technology, cryptocurrencies, and privacy. Robert has a Bachelor of Science from UCL, and a Master's degree from the University of Oxford's Internet Institute.

The Grayscale Bitcoin Trust is a closed-end trust that lets US investors trade crypto on the stock market. It’s one of the only ways that traders can do so. It’s highly attractive to institutional investors, plus those who want to trade from tax-sheltered accounts.

In short, the trust, also known as GBTC, is a large pool of investors’ money that is used, exclusively and entirely, to buy Bitcoin. As of May, 2021, the trust manages $36 billion of investors’ money.

To invest in the trust, accredited (rich) investors can wire either US dollars or Bitcoin. Grayscale will return investors shares in GBTC, and they can trade these shares on the stock market, just like Tesla, Amazon, or Google stock.

The trust, launched in September, 2013 and run by CEO Michael Sonnenshein, trades on an over-the-counter desk under the ticker GBTC. The price of these shares, more or less, track the price of Bitcoin through the CoinDesk Bitcoin Price Index (XBX). As of May 2021, there are almost 700 million shares, and each share represents precisely 0.000943275 Bitcoin.

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New York-based Grayscale is one of many subsidiaries of Digital Currency Group, a New York crypto venture capital fund run by Barry Silbert. DCG has invested in a broad portfolio of crypto companies, such as crypto exchange Coinbase, media outlet Coindesk, and Dapper Labs, creator of CryptoKitties.

Grayscale also operates trusts for most major cryptocurrencies, among them Ethereum, Chainlink, and Stellar. Bitcoin makes up the bulk of Grayscale’s total AUM of $51 billion. The next largest trust is the Grayscale Ethereum Trust, which has about $13 billion in assets under management.

To put things into perspective, the Grayscale Bitcoin Trust alone controls 3.12% of all the Bitcoin in circulating supply. That makes it by far the largest treasure chest of Bitcoin held by a regulated company. By way of comparison, Tesla, Elon Musk’s car company that disclosed billions of dollars worth of Bitcoin purchases in February, holds just 0.229% of all Bitcoin in circulation.

Capital IQ lists the top three investors in GBTC as BlockFi, a crypto lending firm, and crypto hedge funds Three Arrows Capital, and Horizon Kinetics. The Rothschild Investment Corporation and Sandhill are among major investors.

Regulatory Arbitrage

The Grayscale Bitcoin Trust is valuable for investors who refuse to use unregulated, uninsured cryptocurrency exchanges, or for investors who aren’t allowed to, say, invest their Roth IRA in Bitcoin directly. They can invest their retirement in Grayscale’s crypto fund instead and reap the tax breaks that such accounts afford them.

More than that, it’s very easy to invest in the Grayscale Bitcoin Trust. If, for instance, you wanted to invest in Bitcoin directly and had never done so before, you’d have to learn a whole new language of cryptocurrency wallets, private keys, and decentralized ledger, and work out which cryptocurrency exchanges are worth the risk. This is very complicated, and for certain investors, who may only hold Bitcoin as a small proportion of their portfolio, is far more trouble than it is worth. By contrast, investing in Grayscale’s trust is no different than investing in any other closed-end fund.

There are a couple of similar trusts that compete with the Grayscale Bitcoin Trust in the US. There’s the Osprey Bitcoin Trust, which charges fees of just 0.49%. Then there’s WisdomTree and ETC Group. All of its competitors are far smaller than GBTC.

In ETFs We Trust

There’s a larger reason why Grayscale’s trust is so popular—and one that deserves special attention. Quite simply, Grayscale’s Bitcoin trust fulfills a strange, regulatory niche that may one day no longer exist. Mostly, it gets its raison d’être from the edicts of the US Securities and Exchange Commission, the US’s top securities regulator.

The SEC is very cautious about crypto and has severely limited the types of crypto investment vehicles that can be listed on the stock exchange. Nevertheless, the SEC has allowed Grayscale to operate its own Bitcoin trust. Given that just a few companies have such licenses, Grayscale managed to become very big. It is also very profitable for Grayscale, which charges a 2% management fee.

But the relevance of the Grayscale Bitcoin Trust could change in a heartbeat. Should the SEC approve an application for an ETF, which would likely be far cheaper and would more accurately track the price of Bitcoin than Grayscale’s trust, Grayscale’s golden goose could turn into a lame duck.

To date, the SEC has quashed many applications for Bitcoin ETFs, arguing that the unregulated Bitcoin market can be manipulated by actors outside of its jurisdiction. And with good reason: When crypto company Bitwise pitched a Bitcoin ETF to the SEC in 2019, it claimed that an astonishing 95% of the trading volume data was made up.

Wash trading, the practices whereby an exchange trades crypto among itself to drum up the numbers, is rampant, claimed Bitwise. The SEC promptly rejected Bitwise’s application for an ETF, even though Bitwise claimed it sourced price data from accurate sources. Bitwise, just like all the others, (including Grayscale, who was rejected for a Bitcoin ETF in both 2016 and 2017), couldn’t “insulate” its ETF from “attempts at manipulation in a way beyond that of existing derivative securities products that trade on highly regulated markets,” concluded the SEC.

Grayscale plans to convert its trust into an ETF as soon as possible; indeed, this was the plan all along, and one reconfirmed in April, 2021 when it said, “We are 100% committed to converting GBTC into an ETF.” It all depends when and if—and it’s a big, if—the SEC decides to approve Bitcoin ETFs in the USA.

Financial institutions hope that the Biden administration will be more amenable to an ETF, and several companies have refiled applications for an ETF in the hopes that the SEC’s new chair, Gary Gensler, will approve them. (Gensler once taught a course on Bitcoin at MIT, which investors scrutinised after he assumed his new role to work out if he was a crypto fan. They didn’t find much).

Adding to the speculation is neighbouring Canada, which has already approved several Bitcoin (and Ethereum) ETFs, each of which have been a rousing success. The first Bitcoin ETF, launched by Canadian financial institution Purpose, raised $421 million in its first two days of trading, and was the most popular ETF in the country on its first day.

Bloomberg reporter Eric Balchunas said, “If it were to keep up this pace it will be the biggest ETF in Canada in 20 days.” Alas, it didn’t, and trading cooled down. But, its success proved one thing, said Balchunas: “[It] confirms just how potent a US bitcoin ETF would be.”

There is one other reason why investors are yearning for change: the Grayscale Bitcoin Trust has, for the bulk of 2021, traded at a discount to the price of Bitcoin. As of May 2021, buying Bitcoin through Grayscale’s trust is, proportional to the price of Bitcoin per share, 20% cheaper than buying Bitcoin through, say, Binance or Coinbase.

This, on the surface of things, seems like a great thing, and a welcome change from the years during which the trust traded at a premium to Bitcoin—that is to say, buying Bitcoin through the trust cost more than it would when buying it on a regular cryptocurrency exchange (and that’s before accounting for Grayscale’s hefty 2% fee).

But it is far from beneficial for large investors who bought shares in Grayscale’s trust at a premium, only to see them slide in proportion to the price of Bitcoin. Lots of investors had also taken out huge loans to buy shares in the trust in the hopes that the premium would rise even further; since that hasn’t happened, they’re now in hot water and may find it difficult to maintain their positions or repay those huge loans.

Mike Novogratz, the CEO of Galaxy Digital, a competitor to Grayscale that plans to launch its own Bitcoin ETF, said that the SEC failed to protect consumers. The Trust, he told New York Magazine at crypto conference Ethereal Summit in May, “was a great piece of business if you were Grayscale. But if you’re a consumer, you were buying Bitcoin at a 20-30% premium being arbitraged by hedge funds into a closed-end fund—where an ETF would have been a much more elegant solution. When I look at the SEC, I give them a low grade on that.”

And Marlton, an investment firm for ultra-high-net-worth-individuals that has a large stake in the trust, called the discount “abysmal.” James Elbaor, who runs the company, said in a letter to Grayscale’s board of directors in April that he thinks that the discount has cost shareholders $3.1 billion. When Grayscale CEO Michael Sonnenshien told Coindesk that it’s a non-issue, Elbaor retorted: “We also believe this explanation to be irresponsible and indicative of a disregard for the fiduciary duties of a responsible manager. Maximizing stockholder value should be Mr. Sonnenshein’s focus.”

The Grayscale Bitcoin Trust may well be consigned to history should someone launch an ETF that trades closer to the price of Bitcoin (known as close to its NAV, or Net Asset Value). For now, as Marlton pointed out, Grayscale is “simply doubling-down on a ‘wait and see’ strategy.”

Last Updated March 15, 2022

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