Bitcoin’s shocking surge to record highs after investors raced about exposure to the rally – even if it meant paying absurdly high markup.
As the largest cryptocurrency raises over $ 23,000 for the first time this week, the mania pushed the price of the Bitwise 10 Crypto Index Fund (BITW ticker) as much as 650% higher than the value of its holdings and is currently trading near 350%, according to data collected by Bloomberg. Meanwhile, the premium on Grayscale Bitcoin Trust (GBTC ticker) increased to 34% in the middle of the rally.
Such displacements mean that large institutional investors and mother-and-pop traders alike have to pay hugely to buy shares, versus buying out the underlying holdings completely. But as Bitcoin’s 200% rally so far attracts feverish attention and fears of losing out further on earnings, demand for anything with crypto wrappers is booming. For those investors looking for access to Bitcoin but who are reluctant or unsure how to gain direct exposure, the ease of purchasing products like BITW or GBTC through a brokerage platform cuts the additional cost.
“The answer is not as simple as ‘does it make sense to pay for that?’ in a vacuum. It doesn’t make any sense at all to pay that premium, ”said James Seyffart, Bloomberg Intelligence ETF analyst. “But I think some level of premium is justified, and if you want access to Bitcoin, there really aren’t any better options.”
BITW has soared at 165% since its first appearance earlier this month, beating the gains in Bitcoin and Ether by a distance. GBTC has climbed around 40% over that period. That performance creates the gap between the prices of the product and the net asset value of their underlying holdings.
Those dislocations sometimes appear in the $ 5 trillion exchange-traded fund universe – especially in periods of heightened volatility, such as in March – but rarely exceed 3%. When they do so, specialist traders known as authorized participants step in to arbitrate the loophole by creating or redeeming ETF shares.
However, given that the Securities and Exchange Commission has not yet approved an ETF format for cryptocurrencies, no such intermediaries exist for the Bitwise and Grayscale products. Neither vehicle allows redemptions, which results in a fixed number of shares being issued, although GBTC allows secondary offerings to institutional investors who contribute Bitcoin. However, that can create staggering discounts or premiums when supply and demand imbalances arise.
Companies dabbling in crypto-related industries have served as a proxy for exposure since the Bitcoin bubble in 2017. Investors took that to a new level when business intelligence company MicroStrategy Inc. moved. its treasury holdings to the cryptocurrency in August, prompting its shares. to more than double.
The premiums show “a phenomenal investor demand for Bitcoin exposure through methods other than direct ownership or through crypto exchanges,” said Nate Geraci, president of ETF Shop, an investment advisory firm. “It’s perfectly mind-boggling that regulators allow retail investors access to these products, but they won’t allow a Bitcoin ETF that would easily solve the premium issue.”
A rough calculation of the back of the envelope suggests that investors, at a 34% premium, pay the equivalent of $ 30,522 if Bitcoin’s price is $ 22,800 a penny. At BITW’s 358% premium – which only holds Bitcoin – that amount balloons to $ 104,424.
But still, for investors looking for crypto exposure in retirement accounts or other portfolios, buying shares of BITW or GBTC is probably considered the easiest way to use a digital asset trading platform, according to Seyffart.
“If you want Bitcoin in your current brokerage IRA, the simplest way is through GBTC,” says Seyffart. “That’s not to say that advisors can’t learn how to use crypto or Cash Cash apps, but if you want to get Bitcoin in previously existing financial systems – where almost all the money is – you need something that works that system. ”
– With the help of Vildana Hajric.