Understanding the Grayscale Bitcoin Trust: A Comprehensive Guide

Back in 2013, Grayscale launched the first-ever Bitcoin fund known as the Grayscale Bitcoin Trust (GBTC), allowing traditional investors to get exposure to BTC without having to buy and securely store the digital currency themselves.

If you’d prefer to hold your private keys to your Bitcoin investment, you can use Trust Wallet to manage and store your BTC. Trust Wallet is a non-custodial wallet, which means only you control the digital assets stored therein.

In this comprehensive guide to understanding the Grayscale Bitcoin Trust, we’ll look at the evolution of GBTC, its investment approach, its impact on the crypto market, its cons, and its exchange-traded fund (ETF) journey.

The Evolution of the Grayscale Bitcoin Trust

The Grayscale Bitcoin Trust is a TradFi (traditional finance) product that exposes traditional investors to Bitcoin. It’s the largest Bitcoin fund in the world and the first trust with a cryptocurrency as its underlying value.

GBTC was launched by Grayscale, one of the biggest cryptocurrency asset managers. It is the first investment instrument of its kind to regularly report its financials to the US Securities and Exchange Commission (SEC) after registering its shares with them. The GBTC is one of several crypto investment products that Grayscale Investments offers.

The Trust was originally launched on September 25, 2013, as the Bitcoin Investment Trust (BIT). It debuted as a private product for selected investors but would later receive the Financial Industry Regulatory Authority’s (FINRA) approval to publicly sell GBTC shares to retail investors. This meant that all types of investors could now buy and sell the Trust’s shares under the GBTC ticker.

Grayscale considers GBTC a traditional investment instrument, allowing investors to have shares in their name. However, it’s important to note that GBTC isn’t a Bitcoin ETF but is designed after well-known commodity investment products, such as the SPDR Gold Trust.

Today, Grayscale provides investors who choose to invest in GBTC a chance to gain exposure to Bitcoin via an open-ended private trust that, to date, has over 649,130 BTC without the need to deal with the hassle of buying and managing BTC directly.

Understanding GBTC and its Investment Approach

GBTC was the first publicly traded trust that had a cryptocurrency as its underlying value. Funds or trusts that are traded on public stock exchanges usually have an underlying asset that determines their value. The underlying assets tend to be stocks traded in public companies or commodities.

The price of the shares of the trust can fluctuate depending on the underlying net asset value (NAV), which is affected by the increased or decreased demand for the asset. Investors looking to invest in a trust can purchase a piece of the underlying asset by buying shares in the trust.

Since GBTC is a digital currency trust, investors can purchase its shares via their brokerage accounts. By doing so, they’ll indirectly buy BTC while avoiding the technical aspects of buying and holding Bitcoin via a crypto exchange. As an investor, you’ll depend on Grayscale to buy and HODL BTC on your behalf.

This means that the actual BTC bought is stored and managed by Grayscale’s institutional trust, and its retail index fund can be traded on either the over-the-counter or open market.

In the case of GBTC, it’s traded publicly under the Alternative Reporting Standard on OTCQX. OTCQX is an over-the-counter market. And because GBTC derives its value from BTC, its success always mirrors that of Bitcoin.

GBTC is similar to a cryptocurrency ETF as it pools investor money - usually in US dollars - together to directly buy BTC and charge the said investors a management fee for investing in the trust. With this model, Grayscale becomes the actual owner of the BTC and not the investors.

The team behind GBTC has also stated that the crypto fund was modeled after the SPDR Gold Trust. However, while the SPDR Gold Trust is backed physically by gold, GBTC is purely backed by Bitcoin.

In addition, as of September 2023, GBTC had $16 billion in assets under management (AUM) and over 692 million shares outstanding. For accredited investors keen on subscribing to GBTC on private placement, the minimum investment requirement is $50,000, which attracts an annual fee of 2%.

Still, anyone can invest in GBTC by purchasing a share. The trust can be bought and sold in the same way as any US security and is also accessible among tax-advantaged accounts such as 401(k)s or IRAs.

GBTC’s Impact on the Cryptocurrency Market

The Grayscale Bitcoin Trust has had a significant impact on the crypto market by providing a regulated investment vehicle that enables investors to add BTC exposure to their portfolios.

GBTC’s main selling point to investors is the exposure it gives them to indirectly invest in Bitcoin without the hassle of having to buy, manage, and own it directly. This eliminates the need to acquire a crypto wallet to buy and store your Bitcoin.

Having Grayscale purchase and manage the BTC at a fee for institutional investors in secure cold storage guarantees the indirectly purchased tokens are safe from potential hacks. Moreover, GBTC regularly reports its financial activities to the US SEC, proving that it has the Bitcoin that its investors have bought.

GBTC provides institutional crypto investors with a means to purchase large buy orders with nominal slippage compared to centralized exchanges (CEXs) that often lack ample liquidity. Slippage in crypto refers to the difference between the expected trade price of an order and its actual price when executed.

Additionally, Bitcoin’s success mirrors that of GBTC as its underlying asset. This means that when the price of Bitcoin soars, the price of GBTC also soars. Similarly, when the price of BTC drops, so does that of GBTC.

Disadvantages of Investing in GBTC

While there’s no denying that investing in GBTC is a great way for investors to gain exposure to Bitcoin without owning it, it’s not void of its risks. Just like with most things crypto, GBTC also has its disadvantages.

1. It's not ideal for small investors. Investing in GBTC is expensive because Grayscale charges a 2% annual management fee. In addition, investors also need to pay high premiums to purchase shares when the demand is high. And if that wasn’t enough, as an accredited investor, you’d need to have a minimum of $50,000 to get a buy-in into the Grayscale Bitcoin Trust.

2. Investing in GBTC doesn’t make you the actual owner of the bought Bitcoin. Instead, these are owned by the Grayscale institution. This means investors can’t opt to redeem their shares in exchange for the actual BTC as they don’t hold the private keys to the purchased and stored BTC.

3. GBTC, as an investment vehicle, isn't registered with the US SEC. Although it regularly reports its finances to the SEC, it’s not required to register with the regulatory body. Although unregistered investment instruments provide investors with cost-effective and convenient exposure, they can be complex and carry additional risks that might not be obvious to investors.

4. GBTC’s value has not been growing with the price of Bitcoin. Buying GBTC shares won’t guarantee you as much potential profit as you could earn if you were to buy and own BTC directly, and the price of the digital currency was to rally significantly. For instance, between 2020 and 2021, the share price for GBTC grew by roughly 220% despite Bitcoin surging by almost 340%. In addition, in November 2022, Grayscale told its customers that it would no longer share its proof of reserves due to security issues.

Recent Developments: Grayscale’s ETF Journey

While Grayscale has been in a legal tussle with the US SEC over its application to convert GBTC into a Bitcoin ETF, its journey didn’t start recently.

In 2016, Grayscale applied for a Bitcoin ETF with the SEC and spent the better part of 2017 in conversations with the regulatory body. Grayscale, later in 2017, withdrew the application as it believed the regulatory environment for crypto assets wasn’t ripe enough.

In October 2021, Grayscale submitted a second application to convert its GBTC into a Bitcoin ETF to the SEC. The US regulator rejected the application on the grounds of potential market manipulation. While other asset managers such as Blackrock and Fidelity also got their ETF applications rejected, only Grayscale went ahead to sue the SEC.

Grayscale argued that the regulatory demands for a Bitcoin future ETF should apply to that of a Bitcoin spot ETF. On August 29, 2023, Grayscale won the legal lawsuit over the SEC after the US Court of Appeals for the District of Columbia ruled in its favor. The US Court of Appeals stated that the US SEC failed to give Grayscale an adequate explanation for its rejection, thus making its original denial null and void.

Following the ruling, GBTC experienced increased trading activity as investors geared themselves up for a narrowing discount to BTC’s spot price. The price of GBTC shares rose from $17.58 to $20.56, which narrowed GBTC’s discount to net asset value from 25% to 17%. This price surge also impacted BTC’s price, which shot up from roughly $25,960 to $27,974.

Bitcoin wasn’t the only cryptocurrency impacted as the effects of the ruling also saw other altcoins like ADA, DOGE, and ETH soar by 5%. The recent legal victory by Grayscale against the US SEC is also expected to improve the probability of converting GBTC into a Bitcoin ETF while paving the way for other Bitcoin ETFs to get regulatory approval.

The court ruling is also expected to significantly impact the entire cryptocurrency ecosystem by providing investors keen to gain exposure to BTC with a regulated investment instrument.

Conclusion

The Grayscale Bitcoin Trust (GBTC) has evolved over the years to become an important investment vehicle for institutional investors looking to diversify their portfolios by indirectly investing in crypto assets.

GBTC has not only provided an avenue for investors to gain exposure to Bitcoin without directly owning it but has also eliminated the need for them to worry about buying and holding BTC. In addition, it has also helped reduce the slippage suffered by most investors when they purchase large BTC buy orders.

Still, GBTC comes with risks. For instance, buying GBTC shares doesn’t make you the owner of the BTC. Also, there’s the aspect of paying high premiums and annual management fees, which makes it less suitable for small investors and doesn’t guarantee investors any meaningful profits at the end of the day.

Although the Grayscale Bitcoin Trust has existed since 2013, it keeps evolving. A clear indication of its evolution is Grayscale’s attempt to convert it into a Bitcoin ETF. As such, investors must keep tabs on developments happening in the crypto investment sphere to be up to date.

Most importantly, should you choose to invest in GBTC, remember to always do your own research (DYOR) and invest only what you can afford to lose.

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Note: Any cited numbers, figures, or illustrations are reported at the time of writing, and are subject to change.