Interest in the Grayscale Bitcoin Trust has increased following the recent D.C. District Court of Appeals ruling siding with Grayscale’s intent to launch a Bitcoin ETF. Read on as we discuss how the GBTC works, its importance for Bitcoin as an asset class, and the battle for a Bitcoin ETF.
What Is the Grayscale Bitcoin Trust?
The Grayscale Bitcoin Trust (GBTC) is a publicly traded investment trust that enables individual and institutional investors to indirectly add bitcoin (BTC) to their portfolios by purchasing shares in the trust.
Investors can buy GBTC shares through their brokerage accounts and benefit from favorable bitcoin price movements without having to securely buy and store the digital currency themselves. Instead, Grayscale holds the “physical” bitcoin on behalf of the trust’s investors.
How Does the GBTC Work?
The GBTC uses funds from institutional investors to purchase bitcoin. The trust holds the bitcoin in cold storage and maintains custody on behalf of its investors. GBTC then issues shares to investors to provide them with indirect ownership of bitcoin.
The value of the shares depends primarily on the underlying asset’s value, which in this case is bitcoin. Grayscale’s shares, however, trade at a premium because supply and demand determine the prices, allowing the shares to trade for up to twice the value of the underlying bitcoin.
Pros and Cons of GBTC
Investing in GBTC has several advantages and disadvantages. Here’s a look at some of the most significant ones.
- Tax advantages: GBTC is publicly traded and accessible through brokerage accounts, which allows investors to utilize their IRA or 401(k) to buy GBTC shares. In jurisdictions such as the US, such investments attract tax breaks.
- Regulator’s access to reports: Unlike most crypto exchanges, GBTC is regulated and sends regular reports to the SEC. As such, the trust files audited reports to safeguard the interests of its investors.
- Cold storage security: GBTC holds bitcoin in cold storage, assuring shareholders of the safety of the underlying of their investment.
- High premiums: Being the first-ever publicly traded trust with a digital currency as its underlying asset means high demand for GBTC shares. As such, the trust has high premiums due to market forces exceeding the underlying bitcoin’s value.
- Management fees: With the 2% annual management fee, small-scale investors face the challenge of a significant portion of their returns being cut to pay fees.
- Indirect bitcoin ownership: The GBTC shares are not redeemable for bitcoin, and the private keys to the bitcon held therein belong to the trust.
Why Is the Grayscale Bitcoin Trust Important?
The Grayscale Bitcoin Trust opens the cryptocurrency industry to traditional investors. Its public listing status allows both retail and institutional investors to gain exposure to bitcoin without concerns around compliance and digital asset storage.
Since the US SEC requires audited reports, investors can access the GBTC records and use them to make decisions.
GBTC vs. SEC: The Battle for a Bitcoin ETF
The Securities and Exchange Commission thwarted Grayscale’s efforts to turn the GBTC into a Bitcoin spot ETF and set off the legal battle that will impact the future of bitcoin.
In its argument, the SEC cited market manipulation concerns. Grayscale fought back with a lawsuit arguing equal treatment of bitcoin futures ETFs and bitcoin spot ETFs.
In August 2023, the US Court of Appeals ruled in favor of Grayscale, leading to a surge in the price of GBTC shares and bitcoin.
While the SEC will no doubt continue to find other avenues to exercise its authority, the ruling is a step in the right direction. GBTC conversion into a bitcoin spot ETF seems more likely now, and similar ETFs are bound to enter the market at some point in the future.
The entire ecosystem could potentially feel the positive effects of that, with mainstream investors likely feeling more comfortable investing in a Bitcoin ETF as opposed to purchasing the digital currency directly. As a result, we could see a substantial amount of new money flowing into bitcoin.