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What Is the Grayscale Bitcoin Trust (GBTC)?

What Is the Grayscale Bitcoin Trust (GBTC)?

Explainers Cryptocurrencies

18 Jan 2021

Grayscale has been featured in the news quite often in recent months, and for a very good reason.

The company is the largest digital asset manager on the market, attracting accredited investors to crypto on the stock market with its flagship Grayscale Bitcoin Trust (GBTC) product.

As institutional investment in crypto is rising rapidly, it's important to talk about Grayscale to see how its products impact the digital asset market.

What Is Grayscale?

Grayscale Investments is a digital asset manager that allows accredited investors in the US to explore cryptocurrency investment products in a regulated environment via the traditional market.

Grayscale was established in 2013 as a subsidiary of the same Digital Currency Group that owns the popular crypto news site CoinDesk.

The company started out by offering its cryptocurrency investment products as a private placement to accredited investors in 2013.

Later on, Grayscale received approval from the Financial Industry Regulatory Authority (FINRA) to trade publicly. The company's cryptocurrency investment vehicles are currently listed on the OTCQX Over-the-Counter (OTC) exchange.

What makes Grayscale interesting for investors is that it offers them exposure to cryptocurrencies on the stock market without having to own Bitcoin - in other words, without the hassle of custody. To achieve that, the company's products are backed by crypto and derive their value from digital assets.

Currently, Grayscale offers investments in the following digital currencies:

  • Bitcoin (BTC)
  • Bitcoin Cash (BCH)
  • Ethereum (ETH)
  • Ethereum Classic (ETC)
  • Horizen (ZEN)
  • Litecoin (LTC)
  • Stellar Lumens (XLM)
  • Zcash (ZEC)
  • Grayscale Digital Large Cap Fund (diversified investment in multiple cryptocurrencies)

What Is the Grayscale Bitcoin Trust (GBTC)?

The Grayscale Bitcoin Trust (GBTC) is Grayscale's flagship digital investment product, which has become widely popular among institutional clients in recent months.

Simply put, the Grayscale Bitcoin Trust works similarly to a commodity Exchange-Traded Fund (ETF) (e.g., gold ETFs) as it is backed by and tracks the price of BTC.

However, unlike ETFs that are available to all investors (on either a national or international level), only accredited investors in the US can access GBTC as the company's Bitcoin Trust is not registered with the Securities and Exchange Commission (SEC).

As a side note, Bitcoin ETFs are not yet legal in the United States. However, that will likely change in the near future.

Unlike the rest of us, accredited investors can invest in securities and private offerings that are not registered with the SEC. However, to become one, a person has to fulfill specific income and net worth requirements, such as having a salary of over $200,000 in each of the two most recent years.

Similarly to ETFs, the Grayscale Bitcoin Trust can trade at a discount or a premium.

When GBTC is trading at a discount, it means that the Net Asset Value (NAV) is higher than the shares sold by Grayscale. On the other hand, a premium on the GBTC price indicates that the Trust's value is higher than the NAV.

In the Grayscale Bitcoin Trust's case, its shares have almost always traded at a premium with a Year-to-Date (YTD) average of 18.4%.

What Benefits Does Grayscale Provide to Investors?

A premium on Grayscale's products means that investors have to bid higher than the actual BTC price to invest in the digital asset.

At first glance, paying nearly 20% extra to get Bitcoin can sound like a wrong move.

However, the premium and as well as the around 2% annual management fee can be totally worth it for many investors.

Unlike with "standard" crypto investments, GBTC investors don't have to go through the procedure of converting fiat to digital assets on an exchange to late withdraw them to a wallet.

Instead, they simply buy a share in Grayscale's Bitcoin Trust that holds them securely at a custody partner.

As Grayscale is a publicly-traded firm that has recently become an SEC reporting company, its products also minimize risks related to security, fraud, and hacks.

Furthermore, in addition to simplifying how they pay taxes after digital asset investments, buying the shares of a publicly-traded company can offer certain tax advantages for investors.

Also, being listed on a stock exchange allows investors to expand their portfolios with cryptocurrencies in addition to traditional assets (e.g., bonds, ETFs, stocks).

Grayscale's Role in Facilitating Mainstream Adoption for Crypto

Due to the benefits listed in the previous section, Grayscale's crypto products have attracted a fast-growing number of investments from both retail and institutional investors.

However, it's important to mention that institutionals accounted for most of the company's capital inflows, which was 93% ($3 billion) in Q4 2020.

According to the last Grayscale digital asset investment report, the company closed all four quarters in 2020 with record-breaking inflows. As a result, the firm's total assets under management (AUM) has grown to $20.2 billion by last year's end.

2020 was a special year for crypto as the industry has attracted numerous institutional investors to digital assets. As a result, they have been investing heavily in BTC.

Business intelligence firm MicroStrategy has invested over $1 billion in BTC, while the Jack Dorsey-led financial provider Square and the insurance company MassMutual has also purchased a total of $150 million of Bitcoin.

As a result, corporate players – from which many are publicly-traded companies – hold over 5.5% of the total Bitcoin supply. Interestingly, Grayscale accounts for roughly half of all institutional BTC holdings.

The reason institutional players are continuously buying up the Bitcoin supply is related to the cryptocurrency's growth potential compared to traditional safe assets, such as government bonds and savings accounts.

Since these failed to generate high yields – the 10-year US Treasury yields only 1.08% –, institutionals are turning to safe-haven assets like gold and Bitcoin to increase their returns and fulfill investor expectations.

However, while gold had a nearly 25% YTD Return on Investment in 2020, Bitcoin's ROI was over 300% in the same period.

In addition to the high growth, Bitcoin's volatility has been stabilizing in recent years – which is now lower than oil's or emerging currencies' –, meaning that investors face decreased risks of extreme price swings while holding BTC.

Institutionals to 'HODL' BTC

Institutional investors are here, and Grayscale offers them an excellent way to get exposure to digital asset investments.

Interestingly, institutionals are increasingly planning for the long-term with BTC, with MicroStrategy chief Michael Saylor pledging not to sell his company's Bitcoin holdings in the near future.

As Grayscale has become an SEC reporting company, it's also important to mention that it is not allowed to sell the Bitcoin holdings in GBTC shares at least for six months (even though investors are free to exchange their GBTC in secondary markets).

And, even after six months, with the continuous growth of inflows, Grayscale is likely to refrain from selling BTC and instead buy more of the coin to meet the surging demand for its digital asset products.

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