It’s been a rough year and change since Bitcoin (BTC 0.21%) peaked in 2021. The leading cryptocurrency has plummeted 59% over the past year, and seen a portfolio-crushing 73% descent since hitting an all-time high just 14 months ago. The implosion of several high-profile digital currency exchanges and platforms has rattled the confidence of traders, but there could be an opportunity in the chaos.
What if I told you that you could buy a position in Bitcoin at a 38% discount? And — no — this isn’t a cruel joke where the trick is just to wait a few months for the denomination itself to get cheaper. The crypto market has shown some signs of stabilizing here. Bitcoin is actually trading slightly higher over the past week as well as the past month.
I’m talking about an opportunity where you can buy $15.94 worth of Bitcoin for less than $10, but — and there’s always a “but” — there’s a catch that may very well scare you away.
It’s a matter of trust
A handful of exchange-traded funds hit the market in the past 15 months, but they’re far from perfect. They don’t own Bitcoin itself, relying instead on futures contracts for the digital currency to participate in the ups and downs of the crypto market. However, Grayscale Investments — a player in the crypto market since its infancy a decade ago — runs a few publicly traded trusts that have direct ownership of the underlying crypto.
Grayscale Bitcoin Trust (GBTC -3.24%) is its largest offering, currently holding more than $11 billion in Bitcoin. Unlike the newer cryptocurrency ETFs, Grayscale’s entry is established as an investment trust. It actually owns the crypto. After seeing FTX, Celsius, Voyager, and other exchanges collapse after taking big risks to provide some bonus yields, it’s comforting to know that Grayscale Bitcoin Trust stores its assets offline, in cold storage.
As mentioned, Grayscale Bitcoin Trust is trading at a 38% discount to its net asset value. The publicly traded trust closed at $9.88 on Tuesday, a 38% markdown on the $15.94 a share it owns in cold-stored Bitcoin assets. As they always say, if it seems to be too good to be true, you’re probably right.
For starters, there’s a price to pay for Grayscale buying, storing, and safekeeping Bitcoin directly. Its management fee is 2% annually, taken out in small bits over the course of the year, like most ETFs and mutual funds. Many of the futures-based ETFs that don’t trade at significant discounts to their assets have lower sponsor fees. Adding insult to injury, this fee is charged on what is currently the $11 billion in assets under management, not the discounted market value of the shares.
The biggest catch: You can’t cash out at the value of the trust’s Bitcoin. You get in or out at the prevailing discounted rate. And — spoiler alert — it’s a discount that has historically widened instead of contracted.
Grayscale Bitcoin Trust consistently traded at a premium three years ago, when it was one of the few publicly traded ways to cash in on the Bitcoin boom. By late 2021, when Bitcoin was approaching $65,000, the trust was trading at a discount in the teens. It’s far deeper now.
A silver lining here is that the discount can also contract, which we’ve seen in recent weeks with the price of Bitcoin starting to stabilize. Grayscale Bitcoin Trust is up 23% over the past month, with Bitcoin itself only rising 2% in that time. This isn’t the norm, of course. As pointed out, even with Bitcoin hitting all-time highs in 2021 the double-digit discount was widening at the time.
There is no free lunch. However, if you feel that Bitcoin will bounce back — and you understand the risks that come with freely trading trusts that will fetch varying premiums and discounts to the underlying assets — this is one path to consider. Grayscale Bitcoin Trust offers crypto investments at a theoretical discount but at a stiff annual sponsor fee.