Here's How Bitcoin Investment Trust Shareholders Got Hosed Out of a $300-Per-Share "Dividend"

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It's just about time to bid adieu to 2017, the year of the cryptocurrency. What began in rather dull fashion will end with virtual currencies logging perhaps the single best year of gains for any asset class that we've ever witnessed. When the year began, the combined value of all cryptocurrencies was a mere $17.7 billion. However, by Dec. 21, this aggregate market cap had increased to as much as $654 billion, representing a nearly 3,600% increase. By comparison, it's taken the broad-based S&P 500 around four decades to deliver similar returns.

Bitcoin put the crypto market on its back in 2017

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Some of the most nascent players really stepped up and made a name for themselves this year. Ethereum, which is the second largest of all cryptocurrencies, galloped higher by over 10,000% at one point, with Ripple up by a staggering 14,000%. A handful of other smaller cryptocurrencies saw gains that practically approached 1,000,000%.

But at the head of the pack, even though it underperformed on a percentage basis for the year, is bitcoin. The world's most popular cryptocurrency began the year at just $967 a coin, but rallied to nearly $20,000 per coin earlier this month, briefly surpassing a $300 billion market cap.

The buzz surrounding bitcoin appears to be a mixture of excitement surrounding blockchain technology and the uptake of virtual coin usage as a form of payment.

Bitcoin has made no secret that its focus is on payment facilitation, so to see a growing number of merchants willing to accept bitcoin as a form of payment is good news. This comes on the heels of Japan accepting bitcoin as regulated, but legal, tender, and both the CME Group and CBOE Global Markets kicking off bitcoin futures trading. In short, bitcoin's validation as a new asset class has grown in 2017.

Similarly, bitcoin's blockchain technology has spurred plenty of innovation in the crypto space. Blockchain is the underlying digital and decentralized ledger beneath virtual tokens that records all transactions without the need for a third party. The potential for blockchain to reduce transaction fees without a middleman, while speeding up transaction settlement times and improving security as a result of decentralization, has a lot of investors clearly excited.

The Bitcoin Investment Trust has been a popular means to get bitcoin exposure

One of the more common ways to invest in bitcoin for folks who've shied away from placing their money into cryptocurrency changes is the Bitcoin Investment Trust (NASDAQOTH: GBTC). Operated by Grayscale, the Bitcoin Investment Trust holds a fairly passive stake in bitcoin, making it pretty easy for investors to calculate its net asset value (NAV).

According to Grayscale, 0.09196874 bitcoin were owned in the Trust per share (1,868,700 shares outstanding) as of Nov. 30, 2017. Running the math, this works out to 171,861.48 bitcoin. At roughly $15,600 per coin as of Dec. 21, this equates to a NAV of $2.68 billion.

Yet, the Bitcoin Investment Trust ended Dec. 21 with a market cap of $3.03 billion. This double-digit percentage premium has become common for investors. In fact, the premium surpassed 100% with frequency for a few weeks during the summer. The reason for the premium appears to be the improved liquidity offered by the Trust relative to purchases made on a decentralized cryptocurrency exchange. That doesn't in any way justify this exceptionally high premium, but it does help explain why investors have been willingly paying 10% to as much as 125% above the current NAV to buy this more traditional equity.

Sorry, Bitcoin Investment Trust shareholders, but you got hosed on this one

However, earlier this month, shareholders of the Bitcoin Investment Trust must've assumed Christmas came early. Grayscale announced that it had assigned a third party to liquidate the bitcoin cash tokens it received as a result of the summertime fork in bitcoin into two separate currencies: bitcoin and bitcoin cash.

For those who may not recall, a majority (80%) of community support was needed to avoid a forking of bitcoin into two currencies. Roughly three-quarters supported an upgrade that would move some data off bitcoin's blockchain to improve capacity and settlement times. Meanwhile, a quarter of the community (what became bitcoin cash) felt that expanding within the existing blockchain was the smarter choice. This inability to hit the desired support level caused a fork into two separate currencies, with bitcoin holders receiving an equal number of bitcoin cash tokens.

Beginning on Nov. 6 and lasting for 32 days, the agent for Bitcoin Investment Trust liquidated the bitcoin cash tokens it received as part of that fork. The result, according to a press release from Grayscale, was a cash remittance of $113.195042 per share for shareholders on record as of Dec. 12, after administrative and agent fees. While not exactly a traditional dividend, this cash payout resulted in a bonus yield of around 7%, based on the share price of the Trust on the day of the announcement.

Unfortunately, this liquidation happened about a few weeks before bitcoin cash's token price really took off. Its announced listing on Coinbase's cryptocurrency exchange briefly shot its price up to nearly $8,500, and it has pushed safely above $3,000 on Dec. 20 and Dec. 21. When the liquidation began, bitcoin cash was trading closer to $600 per coin. If that liquidation had occurred recently, when bitcoin cash trading volume was considerably higher, shareholders would likely have received over $200 more than the $113.195042 in cash per share they're being paid (i.e, $313+ per share). Though it's impossible to accurately predict a top in cryptocurrencies, I can't help but feel that shareholders got hosed on this one.

Is the bubble bursting?

Nevertheless, Bitcoin Investment Trust shareholders should be thrilled they're getting anything at all considering the skepticism surrounding bitcoin and cryptocurrencies in general.

One of the bigger concerns with investing in bitcoin is the possibility that it could be dethroned as the king of all cryptocurrencies. We're seeing more than 50 new virtual currencies, along with their underlying blockchains, brought to market each month. Given that the barrier to entry is so incredibly low, it's certainly not out of the question that a superior blockchain or payment facilitator emerges in the coming months or years.

Regulation is also a double-edged sword for bitcoin. While it's had clear wins in Japan and the U.S., it was also banned in Morocco this November, and remains illegal in around a half-dozen countries. What's more, China cracked down on domestic cryptocurrency exchanges and put the kibosh on initial coin offerings, which is how new cryptocurrencies are brought to market. Regulation could just as easily close as many doors as it opens for bitcoin.

Lastly, there's not much that investors can fundamentally tie bitcoin's performance to. Emotions are fleeting, as are news-driven events, which could make placing a logical value on bitcoin impossible.

I personally believe shareholders in the Bitcoin Investment Trust are playing with fire, but I've been proven wrong before.

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Sean Williams has no position in any of the stocks mentioned. The Motley Fool recommends Cboe Global Markets and CME Group. The Motley Fool has a disclosure policy.