Is GBTC a Good Deal With its Discount?

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A while back I bought some of Grayscale’s Bitcoin Trust (GBTC) in my Roth IRA account for roughly a 50% premium. This means I had to pay $150 for every $100 of Bitcoin held by the trust. Today, the trust trades for a 33% discount, meaning you pay $67 for every $100 of Bitcoin the trust owns, which begs the question, “Is GBTC a good deal or is it going to zero?”

Well first off let’s consider where this premium/discount comes from. When investors sell shares of GBTC the amount of Bitcoin in the trust doesn’t actually drop, so the price of trust, while designed to track the price of bitcoin, floats more freely relative to an ETF for example. A few years ago, when Bitcoin was younger the trust even had as much as a 100% premium since people wanted exposure to Bitcoin through their retirement accounts and were willing to pay a premium for it with few other options of doing so. Now, on the other hand, investors have far more options including crypto-based IRAs through companies like Alto, futures-based ETFs like BITO, a host of Bitcoin mining company stocks like RIOT, or pseudo Bitcoin ETF stocks like MSTR. This, along with a bear market that’s significantly decreased demand for BTC, has led to a significant discount in the GBTC price over the last year and more.

Figure 1: GBTC Discount to Native Asset Value (NAV) (1)

Despite the significant discount scaring some investors off, I think it might be a decent opportunity. Although I’m no financial advisor and this is by no means financial advice, let me explain my thinking. Grayscale holds actual Bitcoin in the trust, and despite the relatively high management fees (2% annually), it seems unreasonable that GBTC should trade for such a significant discount unless investors distrust the company or see some significant tail risk with holding the asset. While I’d certainly prefer holding Bitcoin in my own wallet if the price was 1-to-1, getting shares to a trust which holds BTC at a 33% doesn’t seem like a bad deal. Especially when you expect the discount to largely close come the next bull market when demand increases.

With many institutions applying to the SEC for a spot Bitcoin ETF, Grayscale included, I think it’s only a matter of time before GBTC is eventually converted to an ETF, which should eliminate the any discount almost immediately. And you have to respect Grayscale for hiring a former Solicitor General to sue the SEC after their last ETF rejection (2).

Even if it doesn’t covert, I think GBTC can close the vast majority of its discount come the next bull market, especially if no other spot ETFs are approved. Futures-based ETFs, like the aforementioned BITO, have significant drawbacks like losing value to the native asset overtime, and there will continue to be demand for easy access to BTC exposure in tax-advantaged retirement accounts even if everyone on the planet learns how to setup a self-custodial Bitcoin wallet.

Besides all of the above, the fact that notable’s like Richard Heart (although I’m not necessarily a huge fan of his, I think he says some intelligent things sometimes) argue they’d rather buy GBTC than BTC, and people like the brilliant Lyn Alden keep DCA-ing into GBTC makes me more confident in the play. I will continue to use some of my Roth IRA funds to purchase GBTC until I’m persuaded otherwise. Do you have a different opinion? Tell me why below. And if you liked this article feel free to check me out on Twitter at Nick Farrell.

References:

  1. “-33.20% For Sept. 21, 2022.” GBTC Discount or Premium to NAV. Accessed September 22, 2022. https://ycharts.com/companies/GBTC/discount_or_premium_to_nav.
  2. Bellusci, Michael. “Grayscale Bolsters Legal Team with Top Obama Lawyer Ahead of Spot ETF Decision.” CoinDesk Latest Headlines RSS. CoinDesk, June 7, 2022. https://www.coindesk.com/business/2022/06/07/grayscale-bolsters-legal-team-with-top-obama-lawyer-ahead-of-spot-etf-decision/.