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Bitcoin Investment Trust (OTCMKTS:GBTC): Disregard Comparisons To Traditional ETFs

Bitcoin Investment Trust (OTCMKTS:GBTC): Disregard Comparisons To Traditional ETFs
Written by
Chris Sandburg
Published on
July 4, 2017
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Bitcoin Investment Trust (OTCMKTS:GBTC) is one that we have looked at on a couple of occasions so far this year. When we first highlighted, back in April, Bitcoin Investment Trust went for around $130 a share. At last close, July 3, this had risen to $404 a share – a more than 210% increase across the period.Towards the end of last week, and subsequently into the weekend that followed, the crypto currency space took a bit of a hit. Specifically, a large sell order in the Ethereum markets translated to a spike down in the price of the asset in question, which, despite only temporarily affecting the exchanges, resulted in something of a sentiment hit in the space as a whole.Bitcoin and Ethereum have increased in value to a pretty substantial degree over the last few months and the more conservative side of the markets are calling for a near-term bursting of what is widely regarded as an asset bubble. Last week's price crash fueled these short expectations, and just as we might've expected, mainstream media has jumped on the opportunity to stoke the fire.One of the stocks taking the brunt of this opportunistic journalism is the above mentioned Bitcoin Investment Trust and it's taken a parallel hit to its share price as a result.We argue that this is an opportunity to pick up a cheap exposure.Why? Wider market misunderstanding of what's actually happening.We aren’t going to go into the drivers behind the rising crypto currency markets here. Readers looking to catch up on any of this sort of detail can do so with our previous coverage. Instead, we are going to put forward our argument as to why the primary mainstream argument that Bitcoin Investment Trust is overvalued is incorrect.Take a look at this piece, published by Barrons and based on a CNBC report.For those new to Bitcoin Investment Trust, it's an ETF designed to track the underlying price of bitcoin. With it being an ETF, of course, it has a net asset value (NAV) based on the number of bitcoin he holds. CNBC points out that – right now – this NAV is around $250. As noted above, the ETF trades at around $404 a 61% premium to NAV. For traditional ETF's, this sort of premium could be something of a red flag and it is in their comparison of Bitcoin Investment Trust to a traditional ETF that CNBC have got it wrong.The thing is, with bitcoin, there currently exists certain barriers to holding the underlying asset – barriers that far outweigh those associated with the underlying assets of more traditional ETFs. These barriers are not just rooted in complications associated with acquisition, but also (and perhaps primarily) security concerns. Whether the crypto currency industry likes it or not, cold storage really is the only way to negate the risk of hack-acquisition. Cold storage, however, dramatically reduces liquidity, and in a market that is moving as fast as this one is right now, reduced liquidity can have a serious impact on return.Bitcoin Investment Trust holds its underlying bitcoin in cold storage with a well-known, and regulated, exchange called Xapo. However, buyers and sellers are free to pick up or dispose of shares of the ETF as and when they want, with almost instantaneous execution. As such, Bitcoin Investment Trust is offering the security of cold storage without the liquidity issues generally associated with said storage method.A large portion of the 61% premium to NAV is rooted in this feature.That aside, the speed with which the crypto currency markets are moving right now also negates any reasonable comparison to a more traditional ETF; say a gold ETF, for example. It's a very realistic assumption that bitcoin could gain 100% in value over the coming 6 months. The same cannot be said about gold. As such, the premiums seen in a bullish market are likely to be many multiples of those generally accepted as reasonable in a more traditional asset-based ETF.We aren’t saying this is a risk-free exposure, far from it.Near term, there is every chance that we will see a correction on the current buzz of activity that's driving price up at the margin. Long term however, bitcoin is almost certain to continue to appreciate from current levels and, as it does, the 61% premium to NAV at which GBTC currently trades will erode.Catch up with our previous coverage of this one here!We will be updating our subscribers as soon as we know more. For the latest updates on GBTC, sign up below!Image courtesy of BTC Keychain via FlickrDisclosure: We have no position in GBTC and have not been compensated for this article.

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