- Reuters/Tiffany Brown
Want to invest in bitcoin but don’t know where to start? There’s an exchange-traded fund for you.
But wait, there’s a catch: the ETF shares are double the price of the cryptocurrency itself.
In order to buy the Bitcoin Investment Trust (GBTC), provided by Grayscale Investments, investors have to pay a 106% premium to the actual bitcoin rate, according to data from financial analytics firm S3 Partners.
While that may seem like a steep price to pay, consider that the ETF surged 248% in May, more than three times the 72% increase for the bitcoin-US dollar currency cross. Still, that degree of outperformance is relatively anomalous, with actual bitcoin beating the fund in two of the prior three months.
So why does the GBTC ETF command such a lofty premium? It’s simple supply and demand. As bitcoin demand has grown exponentially, the fund’s shares outstanding have remained around 1.7 million since its inception in 2015. Don’t expect that to change.
“With the operational risk of buying and holding actual bitcoins to support ETF creation very high, and difficult and expensive to insure, it is unlikely that GBTC’s outstanding share amount will climb above 1.7 million anytime soon,” said Ihor Dusaniwsky, the firm’s head of research.
The lack of new shares makes it very difficult for bearish bitcoin speculators to actively short the ETF, simply because there are so few units available to borrow. And the ones that are available can be prohibitively expensive. This creates a situation where expanding bitcoin premiums can go unchecked, aided by a lack of downward selling pressure, according to S3.
However, it’s important to note that paying a lofty premium for the GBTC ETF can also be a money-losing proposition, even if an investor makes a correct bet on the direction of bitcoin. Once demand for the fund starts to wane, the current 106% premium will start to collapse, making it difficult for new buyers to sell out of positions at a profit.
But the ETF wasn’t always this expensive. Prior to the recent spike in bitcoin, the fund traded at an average premium of 10% during 2017. It’s only gotten so stretched since demand started exploding in May.
With all this considered, the final question becomes: is there any way to wager on the decline of this GBTC ETF premium? Not unless you’re willing to shell out, according to Dusaniwsky.
“There are a substantial amount of potential profits to be made as the premium eventually erodes,” he said. “Unfortunately, today there is no way to get into this trade in size.”
- S3 Partners