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The Grayscale Bitcoin Trust (GBTC) is a digital currency investment product that makes bitcoins available to individual and institutional investors. Unlike a direct investment in bitcoin, which may require a deeper understanding of blockchain technology and cryptocurrency exchanges, GBTC offers a more traditional investment in the form of shares.

The trust was originally launched in 2013 but was only available to institutional and accredited investors. On Jan. 21, 2020, GBTC became a Securities and Exchange Commission (SEC) reporting company, registering its shares and making the trust the first digital currency investment vehicle to have this status. In January 2024, Grayscale was finally approved to operate GBTC as a spot bitcoin ETF, along with 10 other funds.

Key Takeaways

• The Grayscale Bitcoin Trust (GBTC) allows investors to access Bitcoin through a traditional investment vehicle.
• Initially launched in 2013, the trust was available only in OTC markets.
• After many regulatory battles, the SEC approved Grayscale’s application to turn the trust into an ETF in January 2024.
• One of the GBTC’s main advantages is its robust security system, designed to safely store the trust’s cryptocurrency.
• Critics argue that GBTC carries significant risks, including volatility and high premiums.

Understanding the Grayscale Bitcoin Trust (GBTC)

Grayscale Bitcoin Trust (GBTC) debuted in September 2013 as a private, open-ended trust for accredited investors. In 2015, it received FINRA approval to trade publicly, which meant that investors could buy and sell public shares of the trust under its ticker symbol, GBTC. 

The trust is solely and passively invested in BTC, enabling investors to gain exposure to BTC as a security while avoiding the challenges of buying, storing, and securing the bitcoins directly. Shares are designed to track the BTC market price with fewer fees and expenses.

GBTC was initially available only as a private placement until 2015, when it began trading publicly on the OTCQX, an over-the-counter (OTC) market, under the alternative reporting standard for companies not required to register with the SEC. 

At the time, GBTC was modeled on popular commodity investment products like the SPDR Gold Trust, a physically backed gold ETF. The company later added additional trusts to make investments in ether, litecoin, and other cryptocurrencies.

Starting in 2017, Grayscale began seeking regulatory approval to operate GBTC as an exchange-traded fund that would be more accessible to retail investors. However, the SEC repeatedly rejected ETF applications, citing fears of market manipulation and investor risk.

The regulator ultimately approved Grayscale’s application for a bitcoin spot ETF in January 2024, along with 10 other applications. GBTC was listed on the NYSE Arca as an ETF on Jan. 11, 2024.

How GBTC Works

As an exchange-traded fund—a type of exchange-traded product (ETP)—GBTC shares can trade on both a primary and a secondary market. The primary market is available only to certain institutional investors.

When an authorized partner wishes to invest, Grayscale buys bitcoins on the cryptocurrency market and issues an equivalent number of GBTC shares in exchange for capital. Those shares can then be sold on the stock market to retail investors.

The trust holds a significant amount of actual bitcoins, and the price of its shares is meant to reflect the value of bitcoin held per share. However, GBTC shares have frequently traded at a large premium or discount to the actual value of the underlying bitcoin, known as its net asset value (NAV), something that appears to have changed since it converted to an ETF.

Advantages and Disadvantages of GBTC

Advantages

One of the primary advantages of GBTC is its ability to provide simplified access to bitcoin, especially for individuals unfamiliar with the ins and outs of cryptocurrency trading and digital wallets.

Unlike direct investments in bitcoin, which require a good understanding of blockchain technology and cryptocurrency exchanges, GBTC allows investors to trade shares in traditional brokerage accounts. This streamlined access can appeal to those seeking exposure to bitcoin’s price movements without learning the intricacies of cryptocurrency transactions.

GBTC is available for investors to buy and sell in the same way as virtually any ETF. GBTC can be traded through brokerage firms and is also available within tax-advantaged accounts like individual retirement accounts or 401(k)s.

This presents a potential tax benefit for investors, allowing them to gain exposure to bitcoin in a tax-friendly manner, a significant advantage considering the capital gains tax implications of direct cryptocurrency investments​.

Another significant advantage of GBTC is its security. Storing cryptocurrency safely is a notorious challenge, and Grayscale says its assets are safeguarded in line with the best industry standards.

Investing in GBTC sidesteps the common security risks of cryptocurrency exchanges and wallet providers. These platforms are frequently targeted by hackers, and many investors have lost funds from security breaches.

Disadvantages

GBTC is known for its high management fees (1.5%) compared with other pooled investment vehicles. The fee structure could erode returns, especially in a bear market, making it a less cost-effective option for investors looking to gain exposure to bitcoin.

The high fees are frequently cited as one of the main problems with GBTC when compared with other traditional investment vehicles or even other bitcoin ETFs.

Pros

• Available through brokerage accounts, IRAs, and 401(k)s

• Crypto assets held are protected by industry-leading security measures

• Is an SEC reporting company

Cons

• Can have large premiums or discounts to NAV

• Relatively high management fee

• Can be highly volatile

Regulatory Issues

Regulatory concerns about GBTC largely stem from the SEC’s cautious approach toward cryptocurrency-based financial products. In 2021, GBTC filed an application with the SEC for full ETF approval.

The application was held up at the SEC, along with similar applications by other prospective ETF providers. In 2023, a federal appeals court ruled that the SEC had improperly rejected Grayscale’s application and had not clearly explained why GBTC should be treated differently from similar products.

The regulator ultimately chose not to appeal the court’s ruling, which required it to review its decision on GBTC. In January 2024, the SEC announced its approval of GBTC along with 10 other exchange-traded funds.

Impact on GBTC’s Value

The trust’s shares traded at a discount to NAV for extended periods due to regulatory uncertainty, with the discount reaching nearly 50% at one point. After the SEC approved the conversion of GBTC into a spot Bitcoin ETF, the fund began trading close to or even at a premium to NAV.

The regulatory maze surrounding GBTC’s ETF conversion reflects broader concerns by regulators regarding investor protection, market manipulation, and the stability and maturity of the cryptocurrency market. The outcome of its ETF application set a significant precedent for how other cryptocurrency investments will be treated.

What Makes GBTC Different From Directly Owning Bitcoin?

GBTC offers a way to invest indirectly in bitcoin through an exchange-traded fund and gain exposure to bitcoin price movements. Owning bitcoins directly means you actually own the individual tokens.

Can Anyone Invest in GBTC?

Generally, any retail investor can invest in GBTC as it is a publicly traded investment product. GBTC shares trade on the NYSE Arca exchange, along with other exchange-traded products, and can be bought through a brokerage account.

What Are the Tax Implications of Investing in GBTC?

Investing in GBTC has different tax implications compared with holding bitcoin directly. Typically, the trust structure may provide certain tax advantages or considerations that individual investors should review with a tax advisor. The taxation of cryptocurrency and crypto-related investments is complex, and the tax treatment of GBTC shares may vary based on individual circumstances and tax laws.

How Does the Premium or Discount to NAV Affect GBTC’s Appeal to Investors?

The premium or discount to NAV in the GBTC mirrors the difference between the trust’s market price for its shares and the value of the underlying bitcoin per share. A premium suggests that investors are willing to pay more for the exposure to bitcoin than the actual value of the bitcoin held, and vice versa. A premium or discount indicates how the shares appeal to other investors.

A premium might mean there is strong demand, but it also suggests that investors are paying more than the underlying asset’s value. Alternatively, a discount could provide an opportunity to buy, but could also be a negative sign about the market’s view of the trust or bitcoin. Understanding these dynamics can help you make more informed decisions regarding potential investments in GBTC.

The Bottom Line

GBTC provides a convenient way for investors to access Bitcoin without direct ownership. It’s available to individuals and institutions through brokerage accounts, IRAs, and 401(k)s. GBTC offers simplified bitcoin exposure but has downsides like high management fees and limited flexibility.

The comments, opinions, and analyses expressed on Investopedia are for informational purposes only. Read our warranty and liability disclaimer for more info. As of the date this article was written, the author owns BTC and XRP but does not own shares of GBTC.