At last count the Securities and Exchange Commission has rejected applications for 11 bitcoin exchange-traded funds. And earlier this month Bitwise Asset Management threw its hat in the ring when it filed an initial registration statement with the SEC for a physically held bitcoin ETF.
Despite the dramatic drop in bitcoin’s price since mid-December 2017, there remains substantial interest in the digital currency. And investors itching to invest in a bitcoin fund already have an option at their disposal with the Grayscale Bitcoin Trust, which trades under the ticker symbol GBTC and has been open to investors as a publicly traded vehicle since 2015.
GBTC is sponsored by Grayscale Investments LLC, a New York City-based digital currency asset management firm.
According to Morningstar, GBTC tops the list of the best-performing exchange-traded funds on a three-year basis with annualized returns of nearly 105 percent.
Sounds impressive, but GBTC isn’t an ETF. And the product’s average three-year return includes both the frenzied run-up in the price of bitcoin that peaked in late 2017, and the subsequent massive price decline. GBTC’s share price ended Thursday at $3.98, down nearly 87 percent from its all-time high more than 13 months ago.
People can invest in the Grayscale Bitcoin Trust one of two ways. But first, a little background on the trust: It launched in 2013 and traded as a private placement for roughly the first one-and-a-half years before it got a public quotation with the OTC market. The publicly traded option is listed on the OTCQX under the GBTC ticker.
The trust is a 506(c) private placement available to accredited investors. People can subscribe to the private placement in dollars in exchange for shares at a daily net asset value. Under Rule 144, investors can resell those shares on the OTCQX marketplace after a one-year lockup period. Those liquid shares can be purchased by non-accredited investors under the GBTC ticker symbol on a daily basis.
“One of the things we convey to regulators and policy makers is we have a pretty long track record and we think it’s battle tested during periods of highs and lows,” says Mark Murphy, vice president and head of public affairs at Digital Currency Group, the parent company of Grayscale Investments.
He adds that investors can buy the bitcoin trust cheaper with the private-placement route because they’re buying it at the daily NAV, while the publicly quoted GBTC trades at a premium that’s driven by client demand and market forces.
“On average, the premium has been about 40 percent,” Murphy says. “It’s probably now closer to 15 to 20 percent, but it has been high historically. (It was 18 percent as of Thursday.)
As mentioned, GBTC is not an ETF. For starters, it’s not registered with the SEC and it trades on the over-the-counter market rather than on a national exchange such as the NYSE, Nasdaq or Bats. Furthermore, it doesn’t employ the share creation and redemption mechanism that helps keep an ETF’s market price close to its underlying value.
“New shares can be created only through the private placement,” says Matt Beck, Grayscale’s director of investments and research. “We’re only creating new shares, and because it’s not an ETF at this point there’s no redemption mechanism, so there’s no reduction of shares and the number of shares increase over time.”
The bitcoin trust is based on the TradeBlock XBX Index that represents the U.S. dollar equivalent spot rate for bitcoin. According to TradeBlock, the index value is algorithmically calculated every second based on observed trading activity on leading bitcoin exchanges.
GBTC’s expense ratio is a weighty 2 percent. It’s a Delaware grantor trust and is treated as a pass-through entity for taxation purposes. According to Morningstar, it has $706.6 million in assets. But that amount includes money held in the private placement.
“It’s the net asset value of the shares times the total shares outstanding,” Beck says. “It incorporates the private placement and it’s not based on the market price of GBTC.”
10 Products
Grayscale has nine single digital-currency investments focused on bitcoin, ethereum, ZEN, litecoin, lumens, XRP and Zcash, among others. It also has an index product called the Grayscale Digital Large Cap Fund, which targets exposure to the large-cap segment of the digital asset universe.
“You can consider it [the Large Cap fund] to be like the S&P 500 for this asset class,” Beck says.
He notes the majority of investors who invest with Grayscale directly through the bitcoin private placement are institutional investors, particularly hedge funds.
“In 2018 we raised roughly $318 million in new capital across our suite of 10 investment products,” Beck says. “And about 65 percent of those inflows came from institutional investors, dominated by hedge funds.”
Ultimately, he adds, the goal for all of these products is to provide liquidity for their investors through potential public quotation on the OTC marketplace.
Other than GBTC, the only other Grayscale trust currently trading on the OTC market is the Grayscale Ethereum Classic Trust (ETCG).
Bitcoin: Buzz, Or Bust
As referenced, bitcoin’s price has gone belly up since its all-time high of almost $20,000 on December 17, 2017. It ended trading on Thursday at $3,419. Not surprisingly, both Beck and Murphy strongly believe it has a bright future.
“It’s an early-stage, nascent yet potentially disruptive technology,” Beck says. “From a fundamental perspective we see continued adoption. But as a nascent and risky asset class it comes with volatility.”
“We’ve had about five 80-percent drawdowns since bitcoin was founded 10 years ago,” Murphy says. “But the other four were less well-known because there wasn’t as much media attention back then. Clearly there was a bubble at the end of 2017. There’s a lot of fixation in the popular media around price, but the reason why people are excited about bitcoin is because of the underlying technology. We still feel very good about it as an investment opportunity because it’s a breakthrough that enables the instant transfer of something of value without an intermediary.”
Bitcoin—and digital currencies in general—still have many diehard fans. And eventually the SEC will likely approve one or more bitcoin ETFs when it’s satisfied that any such product offers the proper investor protections.
Bitcoin ETFs will probably be less costly than GBTC with its 2 percent fee. Is Grayscale worried that GBTC—and perhaps the private-placement bitcoin trust—will bleed assets if and when the SEC approves a bitcoin ETF?
Murphy wouldn’t directly comment, but he did pass along an emailed statement: “We are unable to comment on the impact or status of SEC approval of an ETF, but we maintain a constructive dialogue with all relevant regulators.”