You can buy bitcoins at a discount, but there’s a catch

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It’s been a rough year and changes Bitcoin (BTC 0.34%) The leading cryptocurrency is down 59% over the past year in 2021, and is down a portfolio-crushing 73% since hitting an all-time high just 14 months ago. The explosion of several high-profile digital currency exchanges and platforms has shaken traders’ confidence, but there may be an opportunity for chaos.

What if I told you that you could buy a position in Bitcoin at a 38% discount? And — no — this isn’t some cruel joke where the trick is to just wait a few months for the price to drop. The crypto market has shown some signs of stabilization here. Bitcoin is actually trading slightly higher than last week as well as last month.

I’m talking about an opportunity where you can buy $15.94 worth of bitcoins for less than $10, but — and there’s always a “but” — there’s a catch that might scare you.

Someone is placing a coin with the Bitcoin logo in a gold piggy bank

Image source: Getty Images.

It’s a matter of trust

A handful of exchange-traded funds have hit the market in the past 15 months, but they’re far from perfect. They don’t own bitcoins, instead trading in futures contracts for digital currencies to participate in the ups and downs of the crypto market. However, Grayscale Investments — a player in the crypto market since its infancy a decade ago — runs some publicly traded trusts that directly own the underlying crypto.

Grayscale Bitcoin Trust (GBTC -3.69%) At its largest offering, there are currently more than $11 billion in bitcoins. Unlike newer cryptocurrency ETFs, Greyscale’s entry is set up as an investment trust. It actually owns crypto. After watching FTX, Celsius, voyagerAnd while other exchanges collapse after taking big risks to pay some bonus yield, it’s comforting to know that Grayscale Bitcoin Trust stores its assets offline, in cold storage.

As noted, Grayscale Bitcoin Trust is trading at a 38% discount to its net asset value. The publicly-traded trust closed at $9.88 on Tuesday, a 38% markdown on the $15.94 a share it owns in the frozen bitcoin asset. They always say, if it seems too good to be true, you probably are.

For starters, there is a price to pay for buying, storing, and protecting bitcoins directly. Its management fee is 2% annually, which is charged in small bits over the year like most ETFs and mutual funds. Many futures-based ETFs that do not trade at a significant discount to their assets have low sponsor fees. Adding insult to injury, this fee is charged on the $11 billion in assets currently under management, not the discounted market value of the shares.

The biggest catch: You can’t cash out the trust’s bitcoin value. You can enter or exit at prevailing discount rates. And — spoiler alert — it’s a discount that’s historically widened rather than a deal.

Grayscale Bitcoin Trust has consistently traded at a premium three years ago, when it was one of the few publicly traded ways to cash in on the bitcoin boom. By late 2021, when bitcoin approached $65,000, the trust was trading at a discount in the low-teens. Deeper now.

A silver lining here is that the discount may also be narrowing, which we’ve seen in recent weeks as bitcoin prices begin to stabilize. Grayscale Bitcoin Trust is up 23% in the past month, while Bitcoin itself is up only 2% in that time. This is definitely not ideal. As noted, the double-digit discount extended even as Bitcoin reached an all-time high in 2021.

There is no free lunch. However, if you think bitcoin will make a comeback — and you understand the risks that come with freely trading trusts that will bring various premiums and discounts to the underlying assets — this is an avenue to consider. Grayscale Bitcoin Trust offers crypto investments at a theoretical discount but with a steep annual sponsor fee.


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