Is Grayscale Bitcoin Trust a Buy?

Bitcoin has had a tumultuous time lately, falling from the heights of the cryptocurrency boom in late 2017 and early 2018 and seeing substantial losses. Even after a modest recovery, bitcoin prices around $4,000 are far below the five-digit figures that they enjoyed in their heyday, and many crypto investors have moved on to other parts of the market.

Nevertheless, for those still looking at bitcoin as an investment opportunity, worries about holding tokens directly have sent many investors looking for alternatives. The Grayscale Bitcoin Trust (NASDAQOTH: GBTC), previously known as the Bitcoin Investment Trust, allows crypto investors to get indirect exposure to bitcoin through its shares, but its structure adds some complexity to investing in bitcoin. Below, we'll look at Grayscale Bitcoin Trust and see whether it's a smart choice for crypto investors right now.

The basics of Grayscale Bitcoin Trust

The Grayscale Bitcoin Trust offers bitcoin investors a way to invest through a more traditional investment vehicle. Rather than having to go to the trouble of obtaining a bitcoin wallet and doing a purchase transaction through a cryptocurrency exchange, investors can buy shares of the trust on the over-the-counter market. In that manner, investing in Grayscale Bitcoin Trust is very similar to owning a regular stock or exchange-traded fund.

To meet its investment objective, the trust obtains and holds bitcoin at the entity level. Currently, the Grayscale Bitcoin Trust holds just over 210,000 bitcoin. Each share of the trust corresponds to slightly less than one-thousandth of a bitcoin, giving the trust a net asset value currently of a bit less than $4 per share with prevailing bitcoin prices near $4,000.

Grayscale is the company behind the Grayscale Bitcoin Trust, and as its sponsor, it collects an annual expense ratio of 2% to cover its costs in managing the trust. Unlike similar funds, however, the trust's bitcoin holdings don't generate any income that Grayscale could use to cover those costs. As a result, Grayscale has to sell off some of its bitcoin holdings to collect its fee. Technically, that's resulted in each share now corresponding to 0.00098576 of a bitcoin rather than 0.001, and the exact figure will keep falling over time.

Why Grayscale Bitcoin Trust is popular

Grayscale Bitcoin Trust has collected more than $800 million in assets under management, and the reason is simple: Grayscale handles all the details of investing in actual bitcoin. The trust buys the cryptocurrency tokens, holds them in secure storage, and makes any required transactions on its own. When investors want to buy more or sell some or all of their holdings, all they have to do is make a regular stock transaction with their brokers. Investors in the trust are freed from all the complicated aspects of trading and owning bitcoin.

It's also easy to hold Grayscale Bitcoin Trust in the same accounts in which you have more traditional stock, bond, and ETF investments. They're even allowed in many tax-favored retirement accounts, and avoiding the need to move money between different types of accounts in order to manage bitcoin and non-bitcoin investments is a big plus.

Paying up for Grayscale Bitcoin Trust

The main problem with Grayscale Bitcoin Trust is that the share price has typically been a lot more than the intrinsic value of the underlying bitcoin the trust owns. Currently, shares of the trust fetch nearly $5, which represents about a 25% premium to the roughly $4 per share that its bitcoin is currently worth.

From a historical perspective, though, this 25% premium is actually quite a bit lower than what the trust has seen in the past. It wasn't uncommon in the heyday of the crypto boom that Grayscale Bitcoin Trust shares might trade at double the value of the trust's bitcoin investment. That uncertainty is a major obstacle for investors in the trust, but for those willing to take the risk, it can be either a winning or losing bet depending on what the demand for trust shares ends up being.

Be careful with Grayscale Bitcoin Trust

I'm never a fan of paying a premium to underlying value for a fund-based investment, and that takes Grayscale Bitcoin Trust out of contention from my perspective. Yet with the delay in coming out with bitcoin ETFs that could offer other ways to invest in bitcoin, Grayscale Bitcoin Trust has its grip on the market, and that gives it some appeal for those who really want to invest in bitcoin without buying it directly.

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Dan Caplinger has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.