Should You Use Grayscale Bitcoin Trust to Invest in Cryptocurrency?

When it comes to investing in bitcoin, you have two basic options. You can buy and hold bitcoin directly, or you can use another type of vehicle that invests in bitcoin on behalf of investors. Because there are no bitcoin mutual funds or ETFs – at least not yet – that leave the Grayscale Bitcoin Trust (OTC: GBTC) as the main way investors can put their money to work in bitcoin without having to buy the digital currency themselves.

However, there are some things that investors should know before deciding to buy shares. In this November 30 Fool is Alive video clip, contributor, Matt Frankel, CFP, a Industry Focus host Jason Moser discussing the big disadvantages of using this alternative bitcoin investment instead of just buying the cryptocurrency itself.

Jason Moser: We’ll see. We have a question from Srinivas, who is asking, what are your thoughts about the GBTC crypto ETF? I don’t know yet, but I want to.

Matt Frankel: I do that and I would love to take that one.

Moser: OK. Well, go for it.

Frankel: That’s the Bitcoin Grayscale Trust.

Moser: There you go.

Frankel: Currently, there are no bitcoin mutual funds or ETFs. The Grayscale Bitcoin Trust intends to fill that gap until the SEC actually approves a bitcoin-based ETF. It’s a way for people to get exposure to bitcoin without actually having to buy it. It works as a fund, where they pool investor money and buy bitcoin. The problem is that it is trading for a huge premium to the value of the bitcoin it owns, as is usually in the 20% -30% range. I haven’t checked recently. But historically, it is traded for at least 20% -30% premium over the value of the underlying bitcoin. So if you want to invest.

Moser: Why do you think that is true? Why do you think they will do that?

Frankel: At first, I think this was because bitcoin is hard to buy, and still not as easy to buy as some other assets. It trades for a huge premium, and Grayscale takes a 2% per year fee for storing the bitcoin. That’s a two percent management fee. It’s a pretty high fee in the world ETFs and mutual funds. The costs in the premium do – I’d stay away. There are not many situations where I would recommend buying real bitcoin, but that’s one of them. If in between, I buy bitcoin.

Moser: Yes. I wonder if he owes money. That is, funds make investing more accessible to many people. The demand for shares from that fund may be higher than the value simply because, as you said, people find it easier to access the underlying asset without having to own it the asset really. Most people can’t necessarily get there and buy bitcoin without knowing a thing or two. All those e-platforms are like Square a PayPal but makes it much easier.

Frankel: Yes. I mean, if you look at the ETFs that own gold, for example, they have management fees because it costs money to store, get things like that.

Moser: Yes.

Frankel: They generally trade at some premium to the value of the gold they own. Not 20% -30%, but some premium. It’s just the costs that are kind of, to my mind, scandalous to Grayscale Bitcoin Trust.

Moser: How much does storage cost? I mean, I understand the cost associated with hunting for bitcoin, the cost associated with mining for bitcoin. But what are the costs of storing it? Isn’t that just a memory?

Frankel: Many cyber security measures need to be taken, many tools that need to be purchased. If you want to keep your bitcoin in cold storage, which means offline storage, you really need somewhere to do it. That is, it’s not a huge cost, but you do need computer equipment. If you hold billions of dollars in bitcoin, you need some of the best cybersecurity operations in the world that help with that.

Moser: Yeah, I guess.

Frankel: Because you don’t want that hacked and lost. If you remember in the early days of cryptocurrency, you would hear about breaking them and exchanging almost every other week, where it was like $ 100 million of cryptocurrency just disappeared and things like that. You don’t want that to happen. There are security costs. Like gold storage, you have to pay for the vault to keep it in and stuff that way. That is, there are costs associated with it. It’s not two percent, which is why they make a profit. But there is some cost to actually storing and preserving gold. As more investors donate their money and have to buy bitcoin, and there are still fees due.

Moser: Yes. That’s a good point.

Frankel: There are costs associated with it.