While many of us would likely never put our funds into a current Bitcoin trust, many new investors feel like using a trust gives them additional security without realizing the details of the trusts.
One of the largest Bitcoin Trusts within the United States is called the "Bitcoin Investment Trust" and trades under the symbol GBTC on numerous over the counter traditional exchanges. The trust works similar to a traditional trust through distributing shares that entitle the holder to a portion of the trust's total assets, but upon further investigation I couldn't believe what these funds are able to get away with. The trading price of GBTC is currently over $700, but one share entitles the holder to less than 1/10th of a Bitcoin. One share is backed by $390 worth at the current price level, yet is trading at the price of $740. To me and you this likely seems crazy that anyone would actually put their funds in such a fund, but the trading volume and activity of these funds has been steadily increasing over the past several months. Investors that come from the traditional stock market would be much more comfortable investing in a regulated trust rather than holding cryptocurrency themselves, but it comes at a serious cost.
It seems as though the amount of bitcoins that the trust holds has nothing to do with the price the shares are able to achieve, because the trust doesn't alter the amount of bitcoin per share based upon the price of Bitcoin. In other words these investment trusts actually don't hold anywhere near the amount of assets that their trading price reflects, which should be an automatic red flag. Any traditional ETF would take a broker or annual fee, but the fund would have to actually contain an amount of assets to reflect the market capitalization of the fund. The GBTC stock is not traded on any major stock exchanges and is pretty hard to acquire, which leads me to question why individuals are flocking to these options in the manner that they are. If an individual spends an hour they can learn how to generate a paper Bitcoin wallet or purchase a cold storage wallet, and they could actually hold an amount of Bitcoin that reflected their investment. Bitcoin still turns many traditional financial investors off and makes them skeptical, which is clear when examining how the share prices of these Bitcoin trusts are able to be so inflated.
Why would anyone ever want to invest in a fund rather than buying and holding the tokens themselves?
While it may seem very straightforward to many of us, many individuals simply have no desire to learn and secure tokens for themselves. While a real Bitcoin ETF could be very helpful for these types of investors, the fact of the matter is that there are no current funds that are anything like a traditional ETF. I'm not exactly sure on how the majority of the Bitcoin investment funds are structured, but I believe that the firm just releases shares which entitle holders to a portion of the funds total assets. If the price of Bitcoin goes up so should the price of the shares, but they should be no where near as inflated as they are right now. Not only does the price reflect a value 300+ dollars over the value of the holdings, but the fund also take a 2% annual management fee. If the price of the shares was a reflection of the value of the underlying assets that the firm holds this management fee may not be a big deal, but coupled with the fact that the 1 share which is currently trading at 700 USD is backed by only .0925 BTC, with a current value of under 380 USD.
I'm really not sure whether investors completely understand the price inflation before they buy shares, but the stock price has been able to become even more inflated over the past month. Individuals who are used and experienced with the traditional stock market would be so much more likely to try to acquire stake in cryptocurrency if there were easy methods of doing so through traditional financial funds, but no good options exist at this point in time. I remember when the Bitcoin ETF was denied by the SEC several months ago, but that hasn't stopped numerous other smaller 'funds' from selling themselves as bitcoin trusts. While the share price of the funds may continue to increase, at some point they are bound to return closer to the underlying value of the assets of the fund. The GBTC fund pays its expenses through its Bitcoin supply, so as time goes on shares actually become worth 2% less Bitcoin per year. The current options in terms of Bitcoin funds are absolutely awful, and should not even be considered as a potential cryptocurrency investment avenue.
I was actually looking into the GBTC fund for a friend of mine this morning, and agreed that I would write him up a quick explanation of the issues associated with the funds. I figured that the information would potentially benefit some new individuals on Steemit so I decided to post it here as well.
I really hope that you enjoyed this post, and I urge you to leave any comments, questions, input, ect. in the comments below! Thanks for reading!
GBTC website can be found here