Investing in Bitcoin without buying Bitcoin

For what seems like the millionth time, the SEC last month once again rejected another attempt at forming a Bitcoin ETF. But for those people who want to invest in Bitcoin through a traditional brokerage like Charles Schwab or Fidelity, there is still the option of the Bitcoin Investment Trust which trades under the ticker GBTC. As of 2018, this is the only method to invest directly in bitcoin without actually buying bitcoin.

GBTC is operated by a company called Grayscale which owns 175,000 bitcoin. Each share of GBTC represents about 0.001 bitcoin. Grayscale runs a number of these investment vehicles also for Ethereum, Bitcoin Cash, XRP, Litecoin, Ethereum Classic, ZCash, and most recently ZEN. Of those, only Ethereum Classic is available for regular investors. The others are only available for “accredited investors”, aka rich people, aka not me. They also have what they call a Digital Large Cap Fund, which is looks like a mutual fund, or a basket of crypto currencies.

The weightings look like they are based off each coins market cap. This may be the closest to a crypto ETF that exists right now. I’d be curious to see if those weights are constant, or if they rebalance regularly. And if so, what kind of fees are involved when they rebalance.

So why would someone invest any of these?

Pros

With crypto exchanges getting hacked on a regular basis, investors may feel uneasy using exchanges to trade. On the other hand, you can protect yourself if you move your crypto off of an exchange on to a wallet. Some people may want to stick with their familiar online brokerage. I can certainly see the advantage of being able to track all your investments in one place.

Because you can purchase GBTC through your regular brokerage, you can buy them in your tax-savings account, like an IRA and Roth IRA. This could mean huge tax savings if bitcoin goes to the moon (assuming that people report gains on their crypto in the first place).

Cons

These investments are not approved by the SEC. Instead of being exchange traded, they are OTC traded, which stands for Over the Counter. This means less regulation and less standards. This means some possibly shady business. Although, considering how bitcoin was founded on the principle of less regulation and decentralization, it is ironic that people now want increased regulation.

Fees and premium. There is a 2% fee that Grayscale charges. Crypto exchanges have fees too, but nowhere near that high.

The price of GBTC doesn’t always correspond with Bitcoin’s price. In fact, it can be even more volatile. Maybe this point is a positive for some folks who don’t get enough of a thrill of watching bitcoin rise and drop 30% each week.

I pulled this from Yahoo Finance. You can see how GBTC has performed about 8% worse than bitcoin so far this year, but there were some instances where GBTC had outperformed bitcoin.

Overall, it doesn’t seem like a great product for more people, unless you want to own bitcoin in your IRA, which I think is a terrible idea. However, the crypto fund looks intriguing because it could allow folks to buy a diversified basket of crypto easily.

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