A wide performance gap and increasing competition from ETFs put bitcoin behemoth in a tough spot
With bitcoin ETFs proliferating in Canada and bitcoin futures ETFs sprouting up in the U.S., it seems other investment vehicles to get crypto exposure might be in trouble – and that includes the world’s largest bitcoin fund.
The Grayscale Bitcoin Trust, which trades with the ticker GBTC on the NYSE, has roughly US$37 billion in assets. It’s resonated so deeply with so many investors in the U.S. because it offers direct exposure to the cryptocurrency – something the Securities and Exchange Commission (SEC) has so far refused to allow for ETFs in the country.
According to an article from Barron’s, many institutional investors also buy GBTC as a way to own bitcoin. The largest holder, Cathy Wood’s Ark Invest, has reportedly put roughly US$375 million in the trust, and Morningstar research reports at least 47 mutual funds and separate accounts owning stakes in the trust.
But shares of the trust are up just 42% this year through October 29 compared to a 95% gain for Bitcoin; the past year has seen the shares go up 220%, lagging the 340% record for bitcoin, according to Morningstar. Longer time periods show even wider performance gaps.
As Barron’s notes, part of the discrepancy comes down to the trust’s 2% annual expense ratio. More significantly, GBTC has a closed-end fund structure with a fixed number of shares on the market, which can trade at a premium or discount to the fund’s NAV depending on market demand.
As of Tuesday, shares of GBTC were trading at a 14% discount to NAV, which means investors buying on the open market effectively get $1 of bitcoin for 86 cents.
“That sounds like a great deal, but the discount to the NAV isn’t likely to narrow soon,” Barron’s said.
Also problematic is the fact that the fund traded at premiums to NAV from November 1, 2018 until March 1, 2021. That means on balance, investors buying on the open market have generally overpaid for bitcoin.
“An investor who bought the fund on the market on Dec. 22, 2020, when the premium was at its peak, would have gained 64% through October,” Barron’s said, citing Morningstar data. “But Bitcoin itself rose 160% over that stretch.”
While the company behind the fund has promised to buy back shares of the trust from the open market in order to narrow that gap, moving the needle will be difficult given its AUM. The task is made more daunting by the presence of several bitcoin ETF, including those from Canada, creating competition for bitcoin.
And while Grayscale might consider converting to an ETF, Barron’s noted that would mean giving up a large chunk of its 2% expense ratio, which represents US$740 million in annualized fee income based on its recent AUM.
