Holding BTC directly or investing in GBTC: A real investor comparison guide

What Are the Differences Between the Two Approaches?

For traditional investors seeking exposure to Bitcoin, there are two options: directly purchasing Bitcoin (BTC) or indirectly participating through investment products like Grayscale Bitcoin Trust (GBTC). But what exactly distinguishes these methods, and how should one choose?

What is the essence of GBTC? GBTC, a digital asset management product under Grayscale launched in 2013, allows investors to gain Bitcoin exposure through traditional brokerage accounts without actually holding Bitcoin. As of October 2023, the trust manages over $16 billion in assets, with a per-share price exceeding $20, and each share representing a net asset value (NAV) of over $24 in Bitcoin.

What does direct holding of BTC entail? Bitcoin itself is a fully decentralized digital asset that can be traded on various platforms or stored in personal wallets or exchanges. Its value is determined by supply and demand, with supply increasing as new blocks are mined on the blockchain.

Core Differences Between GBTC and BTC

Trading Liquidity Comparison

GBTC has been traded over-the-counter (OTC) for more than ten years, with trading volume influenced by market sentiment and Bitcoin price fluctuations. Investors evaluate its performance using a key metric — the premium/discount rate. As of mid-October 2023, GBTC’s discount rate was -15.87%, meaning its trading price was 15.87% below its Bitcoin NAV. This price difference is known as the GBTC-to-Bitcoin conversion gap — the smaller the gap, the more optimistic the market is about converting GBTC into a spot ETF.

In contrast, Bitcoin can be traded on centralized exchanges (CEX) and decentralized exchanges (DEX). DEXs offer direct trading from personal wallets, while CEXs require identity verification and custodial services.

Price Tracking and Returns

GBTC’s price directly reflects the value of its underlying Bitcoin assets, but due to market supply and demand, it may trade at a premium or discount. This premium/discount mechanism is similar to the crypto fear and greed index, reflecting market sentiment — discounts indicate pessimism, while premiums may suggest potential gains (depending on entry timing). This metric significantly impacts investment returns.

Bitcoin’s price is determined solely by market bids, based on supply and demand. Its supply increases at a predetermined rate, independent of banks or governments, exhibiting a different price discovery mechanism.

Storage and Management Methods

For investors who prefer not to manage their crypto assets, GBTC is an ideal choice. It can be tracked and purchased through various securities accounts, eliminating concerns over private key security. GBTC uses cold storage technology (funds are fully offline) and charges an annual management fee of 2%.

Bitcoin, on the other hand, requires investors to take responsibility for their holdings: using hot wallets (online), cold wallets (offline, such as hardware or paper wallets), or custody on centralized exchanges. Storage methods are entirely up to the investor. Large Bitcoin holders often opt for cold storage to maximize security.

Regulatory Environment Differences

While GBTC is not directly regulated by the U.S. Securities and Exchange Commission (SEC), Grayscale, as a reporting entity to the SEC, aims to obtain full regulatory approval in the future. It is expected that once GBTC converts into a spot ETF, it will gain more comprehensive regulatory recognition.

Bitcoin, as a global trading instrument, is still evolving in terms of regulation across countries. The U.S. has gradually clarified its stance on Bitcoin (requiring compliance with AML and counter-terror financing regulations), but overall regulatory frameworks remain uncertain as of 2023. Notably, Bitcoin trading and holdings in the U.S. are taxable, and users must report relevant information to the U.S. Treasury. Policies vary widely across regions, with some countries even banning cryptocurrencies.

How the Grayscale GBTC Trust Works

How does an investment trust operate?

As a closed-end investment product, GBTC has a fixed number of shares. It pools funds from multiple investors to invest in a diversified portfolio managed by a professional team. This structure is attractive to investors lacking portfolio management expertise.

Investors can even leverage their investments by borrowing funds, amplifying gains but also increasing risks. Compared to other investments, such trusts often offer higher dividend yields.

The Original Purpose of GBTC

Grayscale launched GBTC (and other related products) with the goal of making cryptocurrency investing accessible to a broader audience. GBTC has been traded over-the-counter for more than ten years, using alternative reporting standards, thus avoiding SEC registration.

The value of GBTC fully reflects Bitcoin’s price movements. Its trading in traditional stock markets attracts cautious crypto investors. The fund safekeeps and stores crypto assets using cold storage technology, charging a 2% annual management fee. Being regulated, it offers a safer avenue for investors concerned about crypto tax implications.

Understanding the Premium and Discount Mechanism

This is a crucial concept before investing in GBTC. The premium/discount of GBTC refers to the difference between its trading price and the Bitcoin NAV it represents.

When GBTC trades above NAV, it is called a “premium”; when below NAV, it is called a “discount.” This difference is driven by various factors — supply and demand imbalance, investor sentiment, market speculation, etc.

GBTC’s premium/discount reflects market sentiment, similar to the crypto fear and greed index. A discount indicates pessimism, while a premium may point to potential profit (depending on entry timing). These parameters significantly influence investment returns, so investors must pay close attention.

The Lawsuit and Settlement Between Grayscale and the SEC and Its Impact

Turning Point: Lawsuit and Settlement

Grayscale’s lawsuit against the SEC has had a profound impact on the prospects for spot Bitcoin ETF approval. In this legal dispute, Grayscale argued that its proposed spot Bitcoin ETF is “substantially similar” to the Bitcoin futures ETFs previously approved by the SEC.

In August 2023, Grayscale won the lawsuit. The court ruled that Grayscale’s spot ETF proposal is similar to the approved Bitcoin futures ETFs. This decision has altered the crypto regulatory landscape and market accessibility.

The Significance of the Ruling

This ruling sets a precedent that could pave the way for approval of spot Bitcoin ETFs, allowing investors to gain direct Bitcoin exposure without futures contracts. It creates new opportunities for investors and accelerates large-scale Bitcoin adoption.

When the SEC chose not to appeal in mid-October 2023, the market responded enthusiastically. This move helped narrow GBTC’s discount from over 45% at the start of the year to below 16% in October. Investors and analysts now expect the SEC might approve Grayscale’s application to convert GBTC, meaning GBTC could soon become a spot Bitcoin ETF under Grayscale.

Pros and Cons of Investing in GBTC

How to Invest in Grayscale Bitcoin Trust

Interested in investing in GBTC? Here’s a simplified guide:

Step 1: Choose a Broker Find a securities platform that provides OTC market access. Major international brokers are common options.

Step 2: Open an Account If you don’t have one, provide personal info and fund your account.

Step 3: Research GBTC Fully understand GBTC’s mechanism before investing, especially the volatility of its premium/discount.

Step 4: Place an Order After funding your account, locate GBTC on the platform, specify the number of shares, and submit your buy order.

Step 5: Monitor Your Position Keep track after purchase. Remember, GBTC’s price may deviate from Bitcoin’s actual price due to premium/discount.

Step 6: Selling Strategy Sell GBTC shares through your broker account, following a process similar to buying.

Step 7: Tax Planning Be aware of tax implications and consult a tax professional to ensure proper reporting.

Note: GBTC may trade at a premium or discount, influenced by market fluctuations. Availability of GBTC varies across brokers; confirm whether your broker offers this product.

Historical Trajectory of GBTC Price

From early 2023 to mid-October, GBTC’s discount narrowed significantly. At the start of the year, the discount exceeded 45%, but by mid-October, it shrank to below 16%. This narrowing was driven by optimistic market sentiment, especially after the SEC announced it would not appeal Grayscale’s application for a spot ETF.

Not Just GBTC: Other Paths to Bitcoin Exposure

Bitcoin ETF Products

Exchange-Traded Funds (ETFs) allow investors to indirectly invest in Bitcoin through traditional brokers without futures. These ETFs aim to track Bitcoin’s price, providing liquidity and easier regulation for Bitcoin exposure. Several Bitcoin ETF products have been launched in Canada and other regions.

Crypto Funds

Managed portfolios holding multiple digital assets. They offer diversification across various cryptocurrencies and are typically managed by professional teams. The product offerings are diverse and plentiful.

Direct Ownership of Crypto Assets

You can also buy and hold Bitcoin, Ethereum, and other assets directly via certain trading platforms. This provides true ownership of the assets. You can profit through spot trading, futures, automated trading bots, P2P trading, and more. Many platforms also offer staking and mining for passive income.

Stocks of Crypto Mining Companies

Some listed companies are involved in crypto mining and related services. Investing in these stocks allows indirect participation in the crypto industry. Several such companies are available on the market.

Blockchain-Related Public Companies

Certain publicly traded tech firms are deeply involved in blockchain and crypto sectors but do not engage directly in mining. This offers another way to participate in the industry. Many well-known fintech companies are included.

When investing in crypto assets, thorough research is essential. Consider your investment goals, risk tolerance, and time horizon. Each option has its own advantages and risks; making informed decisions is crucial.

The Future of GBTC: Is It Worth Investing?

Opinions vary. Some see GBTC as a safe investment, but others worry that its persistent discount reflects a lack of redemption mechanism. Grayscale’s decision was driven by regulatory concerns, and the market expects its status to upgrade to an ETF.

Another perspective emphasizes the importance of directly holding Bitcoin. The original intent of cryptocurrencies was to be fully private assets under user control. Some reject the idea of third-party custody of BTC, believing it limits market participation and asset flexibility. The principle of autonomy is deeply rooted in crypto culture, which explains why many advocates stick to this stance.

However, there is also optimism about GBTC’s future. If it truly converts into a spot ETF, the discount would disappear, restoring market confidence. This would be a key moment for Grayscale to rebuild trust, especially after the FTX crisis impacted trust in trust products.

That said, many still rely on traditional finance, and this pattern is unlikely to change in the short term.

Quick FAQs

What is GBTC’s management fee?
GBTC charges a 2% annual management fee. The fund management claims this rate is relatively low because it does not fully cover management, operational, administrative, and storage costs.

Can I hold GBTC indefinitely?
Yes. As a trust structure, GBTC has no fixed holding period or maturity date. Investors can hold it as long as they wish — short-term or long-term — depending on their investment goals.

How much Bitcoin does GBTC currently hold?
Exact current figures are hard to obtain, but disclosures in 2022 showed approximately 636,696 BTC held.

Why does GBTC’s trading price always deviate from its NAV?
GBTC often trades at a premium or discount relative to NAV. This difference directly impacts returns. When trading GBTC, consider the premium/discount factor.

Does holding GBTC mean owning real Bitcoin?
Not exactly. GBTC provides indirect exposure to Bitcoin’s price, whereas owning actual Bitcoin means direct ownership of the crypto asset. Both have their pros and cons.