According to a press release issued today, cryptocurrency investment firm Digital Currency Group has purchased GBTC shares worth $388 million as of October 19. Aside from that, the corporation has raised its permission to purchase further shares from $750 million to $1 billion.
This comes only two days after the discount on the Grayscale Bitcoin Trust plunged to nearly its lowest position ever, with a discount of -20.5 percent, marking the second consecutive day of decline. This means that the price of the fund's shares is 20 percent lower than the value of the underlying bitcoin represented by each share, resulting in a net loss for the fund. One of the factors contributing to the markdown is the fact that shares cannot be redeemed for the underlying bitcoin.
As soon as GBTC began trading at a discount, the amount of bitcoin that was flowing into the fund came to an abrupt end, and the fund was forced to close. Since February, GBTC's holdings have remained basically unchanged (declining gently due to fees).
Grayscale intends to rectify this in the long run by converting the fund into a bitcoin exchange-traded fund (ETF). However, in order to do so, SEC permission is required. While the SEC has approved the launch of the first U.S. bitcoin exchange-traded fund (ETF), it is based on bitcoin futures rather than spot prices — and the SEC has not yet indicated that it will allow a spot-priced ETF to go online.
Short-term, DCG, which owns Grayscale, is assisting to meet part of the demand, which may help to mitigate the effect of the discount. By the end of April, the company had purchased GBTC worth $193.5 million and had raised its purchase ceiling to $750 million from the previous $500 million. Following that disclosure, the company confirmed that it purchased an additional $194.5 million in GBTC since then.
Lately, Bitcoin has been having a rough go of it. Bitcoin has reversed course and is currently trading around the $40,000 mark, after briefly rising beyond the $50,000 barrier. So, is Grayscale Bitcoin Trust (GBTC), a crypto-stock market play, a good investment right now? Let's take a look at the GBTC stock to find out.
In times of uncertainty, gold has always been the asset class to which investors have turned for refuge. When the coronavirus outbreak broke out, cryptocurrency fans held out hope that Bitcoin would serve as an alternative to traditional financial instruments. With a lot of well-known big-business names getting involved in the field, acceptance is becoming more universal in the industry.
One difficulty is that investors only have a limited number of choices for gaining exposure to digital assets through the stock market. If you're interested in owning and tracking Bitcoin, you may try out the Grayscale Bitcoin Trust. Another is the Bitcoin Foundation.
Grayscale Bitcoin Trust, to be more specific, tracks the price of bitcoin using the TradeBlock XBX Index. However, while the performance of the trust closely tracks that of Bitcoin, the price of the GBTC stock tends to over- or undershoot Bitcoin performance depending on investor perception.
GBTC Stock: It Isn't A Stock At All
When contemplating whether or not to purchase shares in Grayscale Bitcoin Trust, it's important to realize that the trust is not a true common stock. Stocks are ownership interests in a corporation, whereas GBTC shareholders are owners of a portion of an open-ended grantor trust.
Grantor trusts are expected to maintain a set portfolio, rather than a variable portfolio, as part of their obligations. Physical goods and money are frequently held in such trusts. In this scenario, GBTC is a trust that only holds Bitcoin as a form of investment. Keep in mind that grantor trusts are not covered by the Investment Company Act of 1940, and as a result, they do not provide any of the investor protections described above. They are also not covered by the Commodity Futures Trading Commission's regulatory framework.
Grantor trusts, on the other hand, are governed by the Securities Act of 1933 and the Securities Exchange Act of 1934, and they are required to provide regular financial information to the public.
Is GBTC Stock a Good Investment?
In the same way that the underlying Bitcoin is prone to violent swings, the Grayscale Bitcoin Trust also is. Last but not least, it's a wager on Bitcoin, which is considered more of an investment vehicle than a legitimate currency. The increase in institutional investment makes it a valuable commodity to keep an eye on, but dramatic price swings highlight the asset's erratic nature.
The stock of GBTC went from reporting gains substantially in excess of those of the S&P 500 to falling far behind the benchmark index. Bitcoin bulls may find some attraction, but it takes a lot of stomach to ride out the tremendous volatility that has accompanied the cryptocurrency. Given the asset's history of spectacular drops, individuals who invest today may find themselves saddled with even greater losses in the future.
The bottom line is that GBTC is not a viable investment right now. When looking for stocks to buy, most investors would be better served by researching the stock market and collecting a watchlist of profitable companies that are establishing themselves in sound financial positions.
These Are the Doubts Remain
Volatility, insurance, and security concerns continue to be hurdles in attracting traditional investors to the platform. Likewise, the danger of another crash looms large.
Bitcoin's huge energy consumption may prove to be a hindrance in an increasingly ESG-conscious world. And many people continue to question whether investing in Bitcoin is beneficial in any way other than making Bitcoin permabulls further affluent.
Citi GPS (Global Perspectives and Solutions) researchers stated in a report released in March that "Bitcoin's future is... unclear." However, "As the currency balances on the brink of universal adoption or a speculative collapse, near-term developments will be critical." according to the authors.