Bitcoin (CCC:BTC) lost 11% of its value during the week of Jan. 18-22. In the same period, Grayscale Bitcoin Trust (OTCMKTS:GBTC), the $22-billion investment fund that allows investors to own the cryptocurrency without holding it directly, fell 15%.
Regardless of whether you think bitcoin is expensive, cheap, or fairly valued, as more investment vehicles such as Greyscale pop up, regular retail investors will work to figure out the best way for them to own a piece of the cryptocurrency in much the same way those with the gold bug balance the convenience of the iShares Gold Trust (NYSEARCA:IAU) with storing the precious metal in your own safety deposit box or some other more direct form of ownership.
We all have to do what’s best in our particular situation.
With GBTC falling at a greater pace than the cryptocurrency itself, the question on my mind is whether it makes sense to own the fund at this point.
Let’s weigh the pros and cons.
The Pros of Owning Bitcoin Through Greyscale
Given the amount of bitcoin owned by the fund, you can be sure that institutional investors have gotten on board the cryptocurrency.
InvestorPlace contributor Michelle Jones recently pointed out that “Guggenheim Partners reserved the right for its Macro Opportunities Fund to invest up to 10% of its assets or $530 million into the Grayscale Bitcoin Trust…”
My colleague also pointed out that 28 companies hold at least $1 million in bitcoin, including Square (NYSE:SQ), one of my favorite fintechs. In October 2020, Square invested $50 million in bitcoin to communicate to its customers using Cash App to buy and sell the cryptocurrency that it was serious about its commitment.
As I stated in my most recent article about bitcoin in late December, institutional investors will put the cryptocurrency on a path to higher prices.
“Take the millennials and institutional investors and put them all into bitcoin and it’s hard not to see these two key demographics driving its future price,” I wrote on Dec. 21, 2020.
“A $1 million price tag? It’s not out of the realm of possibility.”
The million-dollar price tag references InvestorPlace’s Matt McCall’s argument why bitcoin could hit $1 million in the future. He wasn’t saying it would, merely that the institutional players piling in would likely influence others jumping on the bandwagon.
For the average retail investor, owning Grayscale stock is a simple way to benefit from bitcoin’s rise to prominence without worrying about details such as how you store it, etc.
The Cons of Not Holding Directly
In December, Coinbase filed confidentially with the Securities and Exchange Commission and is expected to go public early in 2021. Coinbase is the largest cryptocurrency exchange in the U.S. It allows you to buy and sell more than 40 cryptocurrencies including bitcoin.
So, if you buy $100 of bitcoin through Coinbase, the fee would be $2.99 according to its fee schedule, along with a 0.5% spread (it can be higher or lower depending on market fluctuations), for a total of $3.49 or 3.5%.
However, if you buy more than $200 and pay using a U.S. bank account, the fee is a flat-rate of 1.49%. So, if you buy $1,000 of bitcoin, the flat-rate fee is $14.90, the spread charge based on 0.5%, is $5, for a total of $19.90 or 1.99%, 43% less.
Let’s Get Into The Comparison
“Grayscale offers one solution to the problem by selling big-time investors—institutional and accredited ones—shares of a Bitcoin-backed ‘trust’ it established in 2013. Retail investors can buy shares in the so-called Grayscale Bitcoin Trust, or GBTC, after the earlier owners have offloaded their holdings on secondary markets, through brokerages like Vanguard, Charles Schwab, and Robinhood,” wrote Fortune contributor Robert Hackett on Jan. 21.
“Because of the inefficiencies of workarounds such as Grayscale’s, share prices tend to be out of whack with the price of the underlying Bitcoin. Rayne Steinberg, chief executive and cofounder of Arca, a digital asset investment startup, says that premium is ‘a huge tax on an unsophisticated investor.’ Until regulators sign off on a Bitcoin exchange-traded fund, that tax is something retail investors will have to live with.
As recently as December, GBTC shares traded at a 40% premium to Grayscale’s net asset value. After the January correction, it’s down to 2.8%.
So I’m going to suggest that an average Joe buys $1,000 worth of GBTC stock. Let’s put the premium halfway between 2.8% and 40%. Based on a 21% premium, the investor’s getting bitcoin worth approximately $826. Grayscale charges a 2% management fee, which works out to $16.52.
In this example, an investor’s paying $1,000 to get $809.48 in bitcoin. That’s a big price to pay, in my opinion.
The Bottom Line
If you asked me this question in December when trading at a 40% premium, I’d have said no. However, now that it’s trading close to net asset value, it seems like investors are getting a much better deal from a risk-to-reward perspective.
Still early days, in the cryptocurrency wars, if you must own bitcoin, I would seek to do so through Coinbase or one of the other legitimate cryptocurrency exchanges.
Until a bitcoin ETF surfaces and forces Grayscale’s fees lower, I’d be more inclined to go direct.
On the date of publication, Will Ashworth did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia. At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.