What is GBTC?

And why does it matter?

Jul 10, 2022

Dear readers,

In my crypto-learning journey, one term I frequently came across is GBTC. I’ve heard people talk about it in various YouTube videos and podcasts but I really have no idea what they’re referring to.

In this issue, I decided to do a bit of digging and this is what I found out.

Image via Grayscale

GBTC, short for the Grayscale Bitcoin Trust, is a company that owns Bitcoin and sells shares of the company to investors. This means that shareholders indirectly own Bitcoin through GBTC.

The company is set up by Barry Silbert, founder and CEO of Digital Currency Group (DCG) that has invested in other crypto companies such as Ripple (they created XRP), Coinbase and Kraken (both centralised exchanges) to name a few. He got together a bunch of investors to pool their money together to buy a decent amount of Bitcoin. Each share of GBTC is equivalent to 1/1000th of a Bitcoin. This company is managed by Grayscale, an investment company that manages other crypto-related funds and traditional funds too.

At the time of writing, GBTC owns 643,572 BTC valued at $13.6 billion according to the current price of $21,262.80 / BTC. There is a minimum amount required to invest in GBTC, which is $50,000. Not only that, the shares can only be bought through a brokerage account. In other words, not for the retail investors.

Why GBTC?

Institutional Investors

The reason for setting this up is mainly for catering to institutional investors who want to participate in the crypto market but not have direct exposure to it. Imagine if your pension fund provider sees the yields that can be gained from the crypto market and wants to put some money into it. However, since crypto is very volatile, lots of people might be against it. Needless to say, most regulators would be raising more than an eyebrow if they see actual bitcoin in the books of the pension fund provider. By buying shares of GBTC, which is itself regulated by the authorities, it looks less risky on paper.

Avoid Responsibility of Holding Tokens

Buying bitcoin itself also carries its own risks when it comes to storing the tokens. Some people simply don’t want to be bothered by it or have the responsibility of doing so. Therefore, they might also consider buying shares of GBTC to give themselves some exposure.

Taking advantage of Price Difference

Lots of people buy GBTC because they want to take advantage of the price difference. These mostly comprise of traders, not just investors who want exposure to the token. The price difference is known as a Premium.

The price of 1 bitcoin at the time of writing is $21,262.80. If converted to 1/1000th, similar to 1 share of GBTC, the price is $21.2628. The price of GBTC is $13.575. It’s 36% cheaper compared to bitcoin. This means, if you buy a share of GBTC today, you pay 36% less to own bitcoin than if you were to buy it from the market. This is known as a Premium Discount. The inverse is also true. There are times when owning a GBTC share is more expensive than actually owning bitcoin itself.

When there is a discount, it’s known as an oversold situation. This is when more people are selling than buying, resulting in a decrease in demand. Just like in the stock market, if you’re looking to buy something cheap, this would be a good time to do so if you believe in the product / service that the company is offering.

Many investment and hedge fund companies take advantage of the price difference between these two to make huge profits. However, if things don’t go the way they expect, huge losses will also incur.

Why Does a Premium Discount Exist?

The reason for the premium discount to exist is because of two factors:

Demand for the shares of the company is separate from the demand of the bitcoin token itself.
You can buy bitcoin and deposit them into GBTC and get shares issued in exchange but you can’t do it the other way round. This is known as a one-way peg. This means you can buy BTC when it’s cheaper to do so and get shares that are worth more than what you put in. So people can trade that and make a profit with the difference.

GBTC vs Spot ETF

There is talk in the industry about when the US government will allow for the appearance of a Spot ETF for bitcoin. An ETF, known as a Exchange-Traded Fund, is a kind of index that tracks the price of something. Examples of an ETF is the Nasdaq Index (Ticker: QQQ) that tracks the stock prices of companies listed in the Nasdaq exchange. The term “spot” is just another name for market price. Putting the two of them together, you can say that a spot ETF basically keeps track of the price of bitcoin.

If the GBTC gets converted into a spot ETF, which is what Grayscale is applying for, then the aforementioned one-way peg will become a two-way peg. When that happens, the premium will become close to zero. Lots of people are hoping this will become reality because the spot EFT will also allow retail investors to participate.

If you would like to find out more about GBTC, please feel free to check out the links below:

As always, please feel free to share this with others who might have an interest in this topic.

Looking forward to your comments and ideas for future issues.

Beginner Crypto Corner

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