Grayscale Investments, the fund’s provider behind the Bitcoin Investment Trust, invests about $10 million weekly, and the biggest segment of this capital comes from institutional investors.
The New York Company, a subsidiary of the Digital Currency Group, presented its Digital Asset Investment Report with data on the company’s investment performance over the first half of 2018.
The report stated that investors contributed $248.39 million in Grayscale products, even in the period of a ~75 percent decline. This means that they have been investing $9.55 million weekly.
It is also known that 56 percent of the capital, which is approximately $5.3 million per week and $139 million since the beginning of 2018, comes from institutional investors. In addition, they do not present themselves as meaningful investors in cryptocurrency.
Another 20 percent of the total capital comes from accredited investors. Next, 16 percent comes from retirement accounts, as accredited and retail investors can use brokerage services to buy Grayscale products and store them in tax-advantaged accounts. Family officers invest the remaining 8 percent.
What Is the Bitcoin Investment Trust (GBTC)?
The Bitcoin Investment Trust was created on September 25, 2013, and as a 506 private placement in September 2013. It is governed by Grayscale Investments, a unit of Barry Silbert’s Digital Currency Group. DCG is a holding company that works with cryptocurrencies and blockchain technology. The company also owns CoinDesk, a leading blockchain website. It has invested in more than 110 companies all over the world.
The Bitcoin Investment Trust (GBTC) was a traditional investment vehicle with shares titled in the investor’s name. Although the Bitcoin Investment Trust is not an ETF itself, Grayscale states that it is modeled on the SPDR Gold Trust.
The Bitcoin Investment Trust is traded publicly on the OTCQX, an over-the-counter market, under the Alternative Reporting Standard for companies that are not required to register with the Securities and Exchange Commission (SEC).
Since 2013, accredited investors have had the opportunity to buy restricted shares of the Bitcoin Investment Trust directly from Grayscale at a daily net asset value. This depends upon the trailing 24-hour volume-weighted average price of the TradeBlock XBX Index. The NAV was approximately 0.00100733 Bitcoin per share.
The GBTC had stored 177,037 Bitcoins as of January 29. This number has been constantly changing because of money transfers.
After one year, investors who had bought shares directly from the trust were able to sell their shares on the public market. (For the rules addressing the sale of unregistered shares, please refer to SEC Rule 144). With the shares sold into the secondary market, any retail investor can buy them.
According to the SEC’s 1940 Act, GBTC keeps a monopoly as the only U.S.-based investment vehicle that enables direct exposure to Bitcoin through the purchase of a security.
As of the January 29 price, Bitcoin had reached $11,233.95. However, shares of GBTC closed at $19.14, a 69% premium to the NAV. So investors will have to pay 69% more per share than for the underlying asset.
In general, the trust has an open-ended structure, as it can raise assets through private placement, but the difficulty comes with the necessity to wait a year to trade.
What Is the Current Situation?
As of October 2018, GBTC counted $1.34 billion in assets under management (AUM) and 2.06 million shares outstanding. The trust requires a minimum investment of $50,000 and charges an annual fee of 2.0 percent, which comes daily.
Grayscale decided that this invention was worth more than the annual fee, and one of its biggest advantages is its high-level security. Today, holding crypto assets is challenging, and brings a great deal of risk to its holders. To overcome this, the Bitcoin Investment Trust ensures the safeguarded storage of all assets by a robust security system that uses industry-leading security standards.”
The Bitcoin Investment Trust serves as a Bitcoin fund that provides the opportunity to bet on Bitcoin by purchasing shares. The trust keeps Bitcoin on behalf of investors, offering the cryptocurrency custody service Xapo for their safety. Each share of ownership is worth approximately 0.092 Bitcoin, and this sum will be slowly decreased due to fees.
How Much Does It Cost to Invest in the Bitcoin Investment Trust?
There is no ability to manage funds for free. For example, the Grayscale Investment Trust (look for more details in the next chapter) charges a 2% fee of the fund’s assets per year. This is considered to be a high fee to pay; for example, ETF’s fee is about 0.25% per year, to invest in physical gold stored in underground vaults. This means that it is more expensive to store Bitcoin than gold.
The fees are expected to decrease after new competitors come to the market. However, Grayscale has no reason for cutting fees until that happens. Moreover, the cost seems to be over-rounded in comparison to the massive Bitcoin price changes. Anyway, anyone who got a 1,557.2% return on the trust probably is not very upset about the annual 2% management fee.
Owning Bitcoin Investment Trust is more advantageous than buying the digital currency on an online cryptocurrency exchange. And this is not strange, as comfort always costs more.
Grayscale came along with the Bitcoin Investment Trust in 2015, and it became the first of its offerings to be listed on an over-the-counter (OTC) marketplace. Investors allocate $6 million into GBTC every week. Also, about $3.5 million comes from other resources weekly.
Grayscale has also recently issued individual investment funds for Zcash, Ethereum, Bitcoin cash, Litecoin, and XRP.
Andrew Left of Citron Research has publicly criticized the Bitcoin Investment Trust. He stated that the GBTC is the “most dangerous way to own Bitcoin.” Among the main disadvantages of investing in the Bitcoin Investment Trust is paying high premiums along with the annual fee, high risk of overall volatility in the cryptocurrency market, and investment vehicles that are not required to register with the SEC.
Today, the Bitcoin Investment Trust is the only fund of its kind designed specifically for investing in Bitcoin. So investors need to pay a high premium. As of September 2018, GBTC shares were trading at a high of $7.95 — around 20 percent higher than the value of the Bitcoin within the trust that each share represented at the time. The premium is lower than in the past. The prices on the GBTC are more than two times higher than the value of its underlying Bitcoin.
In October 2018, each share of the Bitcoin Investment Trust had less than 0.0001 Bitcoin. In this way, investing in one Bitcoin requires having more than 1,000 shares of GBTC. The GBTC increased in 2017 and reached the top at the end of the year.
In 2018, the position of the Bitcoin Investment Trust is quite unstable, as it decreased in value in October 2018. The decline was nearly 65 percent year-to-date for October. Such declines can also cause shares to decrease in value.
Additionally, shares in the Bitcoin Investment Trust are restricted to a one-year holding period before investors can resell them on the public market. That’s why investors need to consider all the risks of having no liquidity for that period of time.
Canadian First Block Capital Incorporation
The Financial Post announced that the Ontario Securities Commission (OSC) and British Columbia Securities Commission (BCSC) have established First Block Capital, Inc. to run a Bitcoin $6296.88 -0.18% fund as a mutual fund. This is the first and only case of approval of such a product in Canada. The trust was confirmed by the BCSC (British Columbia Securities Commission) and OSC (Ontario Securities Commission), according to First Block Capital.
First Block Capital is a Canadian-based cryptocurrency and blockchain investment company that has its own Bitcoin trust, FBC Bitcoin Trust, which has gained mutual-fund status in Canada. This allows placement of funds in registered accounts such as a Tax-Free Savings Account (TFSA) or Registered Retirement Savings Plan (RRSP).
The aim of the trust is to provide greater access to investment in the digital-currency asset class. For this, unitholders are allowed to place units in government-sponsored tax efficient vehicles. This ensures daily liquidity through NEO Connect, a fund-distribution platform with a constantly increasing network.
Investing in Bitcoin is possible with a registered retirement savings plan (RRSP) and a tax-free savings account (TFSA) by buying a Bitcoin within the NEO Connect platform under the FBCBT ticker.
Anyone who is an accredited investor can familiarize him- or herself with the FBC Bitcoin Trust on NEO Connect, a fund-distribution platform, under the ticker FBCBT. In this way, trading is as efficient as trading ETFs.
This trust also provides the opportunity to get Bitcoin without acquiring, holding, or managing actual Bitcoins. Trust units are a qualified investment in a mutual fund trust under the Tax Act. As reported recently, the fund was said to have more than 150 unitholders in less than a year since its start.
(If you are too conservative for Bitcoin and cryptocurrency investing, preconstruction investment is one of the alternative ways to invest. This article on 7 tips on investing in preconstruction is comprehensively explaining it)
How to Invest in Bitcoin
Investing in BTC and investing in stocks are similar in the context of rapid changes in Bitcoin price. Which steps should one take to invest in stocks?
- Open a brokerage account
- Transfer funds from the bank into the brokerage account
- Buy a stock share with deposited funds (cash balance)
- Sell the stock for a gain or loss. Funds will be returned to the cash balance.
For someone who is willing to invest in Bitcoin, step three is the following: buy Bitcoin or another cryptocurrency instead of stock. Other steps are quite similar. However, this all depends on the exchange or trade platform you are using. Some exchanges provide the ability to buy Bitcoin with a credit card or by transferring funds from a bank account. Other exchanges might require transferring Bitcoin directly (to implement a direct deposit of Bitcoin).
All countries have a different regulation policy towards cryptocurrency, which means that the methods of investing in Bitcoin differ, too. Some countries require more private information for user legitimacy confirmation than others.
How to Deposit USD to Buy Bitcoin
Let’s explore depositing USD to buy Bitcoin using the example of Coinbase, one of the most popular platforms. This exchange employs a common approach to investing in Bitcoin, so the steps are, for the most part, similar to other exchanges.
To begin, open a Coinbase account and link a bank account or credit card. After this, transfer funds from the bank account or the credit card to buy Bitcoin. Remember that buying Bitcoin with a credit card is the most expensive option. If you want to do this much more cheaply, just use a bank account. However, the credit card is also said to be the fastest method of completing Bitcoin transactions.
Having defined the method of buying Bitcoin, enter a USD or Bitcoin amount so the website will convert the currency.
For example, if you enter in $1,000 USD, the website will provide a precalculated amount of Bitcoin according to the current Bitcoin exchange rate. Having filled that amount in, click the button to buy Bitcoin.
Also, remember that your funds will be converted according to the exchange rate at the time you are buying Bitcoin.
This means that if Bitcoin goes up to $1,000 by the time the transaction is implemented, you will miss out on the rise.
Where to Hold Bitcoin?
There are a lot of types of Bitcoin wallets that can be used on mobile phones, desktops, and even as separate hardware.
Cold wallets are the most secure for holding Bitcoin. They are detached from an internet connection, so it is very difficult to hack them remotely.
Available cold wallets include:
- hardware wallets
- paper wallets
- brain wallets
Hot wallets are the most popular, but remember that these wallets protect your funds less effectively, as they are internet-dependent. This means that anyone with an internet connection can gain access to your wallet and control all of your Bitcoin. Here, we can mention desktop wallets, brain wallets, mobile wallets, multi-signature wallets, and SPV wallets.
Remember that there is a fee for wallet usage that the wallet owner must pay.
Fees are a so-called motivation for miners, encouraging them to conclude the transaction in the next block. The transaction fee depends upon the size of the transaction. Another factor that influences the transaction fee is its urgency. If a user wants to speed up the process of transaction approval, he or she will have to pay a higher fee.
The number of transactions can be another reason for an increase in fee. There might be a lot of people who want to approve their transactions, and they will start bidding up the attached fees.
For the most part, exchanges provide their own wallet to hold and receive Bitcoin. You can also choose a wallet that is most suitable for you.
When choosing a wallet, consider the following factors:
- number of Bitcoins to store
- frequency of usage
- support of other types of coins
- the need for constant direct access
- the level of technical awareness
- additional safety from third parties
Check out the best hardware wallets and make your choice:
Having deposited funds into the exchange and bought a specific amount of Bitcoin, you are now ready to make your first investment.
Experience in brokerage platforms will be very helpful, as trading platforms on the exchanges are very similar to a brokerage.
The website will provide you with a chart and buy/sell buttons with the amount of Bitcoin to trade.
When trading Bitcoin, one can also exchange into other cryptocurrencies. This is another method for selling Bitcoin. Yet another method of trading is exchanging from a different cryptocurrency and into Bitcoin, which is the same as purchasing Bitcoin.
If the exchange does not provide the opportunity to purchase Bitcoin by transferring funds or using a credit card, deposit Bitcoin from another exchange.
Now, get the wallet address from the target exchange. Enter it on the source exchange, along with the amount of Bitcoin to send to the new exchange.
It takes a few minutes for the exchanged Bitcoin to transfer into the target wallet.
Consider 10 the most popular Bitcoin exchanges and websites:
- Coinbase is one of the most popular cryptocurrency exchanges, as it provides the possibility of investing directly with USD. However, users should remember that they can only buy Bitcoin, Ethereum, and Litecoin on this platform.
- Huobi is one of the “Big Three” exchanges in the world.
- BitStamp allows direct deposit of Bitcoin.
- Bitfinex offers buying and selling of multiple cryptocurrencies. There is also the possibility to trade on margin.
- Hitbtc is considered to be the most advertised Bitcoin exchange.
- Binance is a great choice to get into cryptocurrencies like Cardano or Neo.
- Bitsane is perfect for getting into Ripple.
- Kraken provides margin trading.
- Coinmama is designed for Bitcoin and Ether. Users can buy cryptocurrency with a credit card, Bitcoin, or Ether.
- Gdax offers very low transaction fees.
How Owning Bitcoin via Investment Trust Differs from Owning Bitcoin
By learning about both the Bitcoin Investment Trust and Bitcoin ownership, we can see both similar and different features. In theory, the Bitcoin Investment Trust increases in value with Bitcoin’s rise and falls with a decrease in Bitcoin’s price. In practice, on roughly one out of three trading days, Bitcoin and the Bitcoin Investment Trust can differ.
A disadvantage of the trust is its unpredictable performance. It is worth saying that the Bitcoin Investment Trust may outperform Bitcoin when investors pile in and underperform Bitcoin when they stop investing. The trust can overshoot both up and down, raising more money than Bitcoin does — even if the digital currency increases in value — and fails faster than Bitcoin if it decreases in value.
If you want to buy shares at a small premium, it would be better to pay up for the convenience and ensure the security of your Bitcoin through a vehicle when buying or selling through an ordinary brokerage account. It is recommended that you cross-check its price or the value of its Bitcoin on a per-share basis. Do you agree that paying such a high price and losing your own money on the Bitcoin Investment
Trust when Bitcoin increases in value is ridiculous?
In conclusion, we can say that investing in Bitcoin does not differ much from investing in stocks. To invest in Bitcoin, one needs to open an account with an exchange. To invest in stocks, a user needs to open an account with a brokerage. The second action is the same: depositing funds.
The only difference between investing in Bitcoin and investing in stocks is that the user should buy Bitcoin, first using deposited funds, before trading Bitcoin. This means that the initial purchase of Bitcoin is the first opening trade.