This bitcoin investment vehicle could be “a disaster waiting to happen”


Bitcoin’s meteoric year is making digital currency owners richer while raising fears that things are getting out of hand.

One investment vehicle stands out – the Bitcoin Investment Trust (GBTC), which is designed to track asset prices but actually trades at a significant premium to the underlying holdings.

Specifically, the price of bitcoin had jumped 170% in 2017 as of Wednesday’s close. Confidence, however, had jumped by around 336%, raising alarm bells that investors trying to capitalize on the rise are taking too much risk.

The big problem is the net asset value, or the price of a stock relative to the underlying holdings.

GBTC holds 174,174 bitcoins, according to the latest regulatory deposit. Multiplying that by the current price of bitcoin and dividing it by the number of shares outstanding suggests a price in the range of $ 250. Instead, the price closed at $ 528 on Wednesday.

“For investors who buy into the fund, such large premiums are a disaster to come,” Sumit Roy wrote in an analysis for

Almost at the right time, the price of the trust fell on Thursday, down more than 8% in afternoon trading, even as bitcoin rose about 1.5%.

A spokesperson for the director of the trust, Grayscale, said the company is prohibited by law from commenting.

Andrew Caballero-Reynolds | Getty Images

GBTC is like an exchange traded fund in that it is passively managed and seeks to replicate the movement of bitcoin. It has been around since May 2015 and is not listed on a major stock exchange, but trades on “pink leaves” or the over-the-counter market. The trust offers investors a rare chance to invest in digital currency without having to purchase bitcoin.

However, the inability to replicate the price in the way, say, the SPDR Gold Shares ETF accurately tracks the metal, is an issue that became particularly acute earlier this year. Grayscale sought in January to make the trust a fully-fledged ETF and was not allowed to create any new shares.

“Why would anyone pay a premium for this? Obviously, the product isn’t performing incredibly well,” said Spencer Bogart, head of research at Blockchain Capital and former seller-side analyst who covered GBTC during his interview. launch.

Bogart believes that the answer to his question is largely due to the fact that there are few or no other alternatives to investing in bitcoin without having to go through the process of actually buying digital currency.

Twin brothers Cameron and Tyler Winklevoss have so far failed to bring a bitcoin ETF to market. Earlier this year, the Securities and Exchange Commission rejected a request for funds that would trade under the symbol COIN. However, the commission decided to review this decision.

“A lot of investment managers have a mandate to invest in registered securities. Spot bitcoin is not a registered security,” Bogart said. “Really, this is the best we have available. It put a traditional wrap around an otherwise esoteric asset. It was something that people could touch. They really wanted to be exposed and that was the only way to. do it.”

If the GBTC effort or the Winklevoss deposit is to be successful, they will likely have to demonstrate a better ability to track the price of bitcoin. Most ETFs successfully use a variety of techniques to ensure that the price represents the value of the underlying securities, whether it is a core stock index, a category of bonds or of a currency.

GBTC is billed as an open-ended investment trust, which means it can sell an unlimited number of shares, unlike a closed-end fund. However, the fund no longer issues new shares or allows redemptions since it requested the conversion of the fund into an ETF so that it can resume normal operations.

Roy said the issues with the trust could actually help the Winklevoss case.

“The SEC can either help investors by allowing a regulated ETF that trades near NAV to come into the market, or they can get in the way and see those same investors hurt when they buy bitcoin directly from exchanges. untested or through faulty GBTC, “he wrote.

As for investors looking to find their way into the bitcoin universe, they will need to understand that buying the currency is risky but that trust seems even riskier.

“There is clearly a risk. Someone could be right about the underlying bitcoin movement but lose money,” Bogart added. “How well do you appreciate the characteristics (of trust)? It’s really an individual question to answer.”

WATCH: Mark Cuban explains why he thinks bitcoin is a bubble.


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