11 January 2022
Ziņas un Viedokļi
Buying Bitcoin with a 20% discount

Bitcoin has lost -40% in value since reaching an all-time high price of $68k two months ago. If you are considering to increase your exposure to Bitcoin, you can buy it with a 20% discount. How?

By buying shares of Grayscale Bitcoin Trust ($GBTC), which currently trade at more than -20% discount to its net asset value:

The discount/premium to NAV is a percentage that calculates the amount that an exchange traded fund or closed end fund is trading above or below its net asset value. This metric can be a valuable metric to track how far away a security is trading away from its true value.

Source: ycharts.com/companies/GBTC/discount_or_premium_to_nav

Market price of a $GBTC share vs value of Bitcoin holding per share:

How to buy shares of $GBTC?

Shares of Grayscale Bitcoin Trust can be bought and sold through any brokerage account, for example: Interactive Brokers, the same way – as you would buy or sell any shares in other publicly traded companies like Amazon, Apple or Google.

In theory, if current market price is $41 000 per Bitcoin, then with a -21% discount you would be buying Bitcoin at price of $32 390.

Will the discount disappear later?

There are couple of problems with $GTBC that also explain why this discount exists:

  1. There is no redemption program – so you cannot exchange $GBTC shares to Bitcoin and Grayscale is not motivated to activate such a program – that would result in lower assets under management.
  2. Annual management fee of 2% in a market, where you can buy similar products with lower fees, for example: Purpose Bitcoin ETF (1% fee, based in Canada).
  3. $GBTC is not an ETF, and although Grayscale filed on Oct. 19, 2021 an application to convert the trust to an ETF, so far SEC has denied all Bitcoin ETF applications. Will SEC change it’s mind in 2022? Not very likely.

The U.S. Securities and Exchange Commission has delayed its decision on a spot bitcoin exchange-traded fund (ETF) proposal from Grayscale Bitcoin Trust, the world’s largest digital currency manager.

In a notice dated Wednesday, the markets regulator said it now expects to review Grayscale’s proposal by Feb. 6, later than the original December deadline.

In October, Grayscale, which has over $45 billion of cryptocurrency assets under management, had said it plans to convert its Grayscale Bitcoin Trust (GBTC.PK) into a spot bitcoin ETF.

Source: reuters.com/markets/us/us-sec-delays-decision-grayscales-spot-bitcoin-etf-2021-12-17/

Twitter thread about Bitcoin ETF approval:

Final conclusion from James: “At the end of the day, issuers are chipping away at the SEC’s arguments from multiple angles but I’m still pretty pessimistic that we will see a Spot #Bitcoin ETF in 2022. The SEC is VERY entrenched against it. If I had to give odds I’d say somewhere around 20%?? Maybe?

According to Bloomberg:

The discount will disappear if the SEC allows Grayscale to convert GBTC to an ETF. We expect the agency to use Bitcoin futures ETFs as a stepping stone.

So it might not happen in 2022, but when the discount dissapears, that could result in good gains:

Hypothetical Gains Solely From Closing Discounts

Source: bloomberg.com/professional/blog/etf-launch-in-october-may-hurt-gbtc-spur-below-market-bitcoin/

When to avoid buying $GBTC?

Historically the premium/discount range to net asset value has fluctuated from to +132.6% (May 31, 2017) to -23.69% (Jan 5th, 2022) and reasons for it are described here: The Problems With the World’s Biggest Bitcoin Fund

The common sense would be to buy $GBTC only when there is a big discount to net asset value and avoid buying, when there is a premium, otherwise you can end up in a situation like this:

Twitter avatar for @kgreifeldKatie Greifeld @kgreifeld

Bitcoin returned ~60% in 2021 $GBTC rose 7%


Key Takeaways

  1. Bitcoin is down -40%, might be worth to buy some or start a DCA strategy.
  2. If you have access to a trading account, $GBTC is one of the ways how to get exposure to Bitcoin, and get a discount at the same time.
  3. $GBTC has a high 2% annual fee, but with -20% discount it still might be a good risk/reward option.

Author: Kristaps Mors, kristapsmors.com