Crypto investors who gained exposure through Grayscale Bitcoin Trust (OTC: GBTC) may be in for a bit of a surprise this December as they look to rebalance their portfolios. While Bitcoin had another gangbuster year, posting a return over 60% thus far into 2021, Grayscale Bitcoin Trust, which acts as a holding company for just north of 645,000 BTC (or ~3.5% of all BTC in circulation), has not fared nearly as well with a year-to-date return of 7.6%
Surprised? The answer lies within the trust’s structure and the difference between an open-end and closed-end fund.
Note: Grayscale Bitcoin Trust is technically a grantor’s trust, which for practical purposes trades similarly to a closed-end fund.
An open-end fund is an investment vehicle that is able to issue an unlimited number of shares. As capital flows into the fund, the new money is used to purchase additional units of the underlying assets. Conversely, a closed-end fund issues a fixed number of shares. As the name would imply, a closed-end fund is ‘closed’ off from new capital. Each unit purchased must be sold by an existing fund investor. This difference means that while open-end funds trade based upon the supply-and-demand dynamics of their underlying assets, closed-end funds trade based upon the supply-and-demand dynamics of their own shares. Accordingly, closed-end funds often trade at premiums or discounts to the actual assets they hold. When everyone is trying to get in, closed-end funds trade at a premium to their holding assets and when everyone is trying to get out, closed-end funds trade at a discount to their holding assets.
To start off 2021, Grayscale Bitcoin Trust was trading at a 17% premium to the bitcoin it held, meaning every $1.17 purchased exposure to only $1.00 in BTC. As of market close Friday, Grayscale Bitcoin Trust was trading at a 21.4% discount to the bitcoin it holds. Before anyone calls this discount a bargain, it is important to note that Grayscale Bitcoin Trust charges a 2.00% annual management fee, which makes holding shares less attractive than direct BTC exposure and the SEC blocked Grayscale Bitcoin Trust’s bid to convert to an ETF earlier this year, which would have been a major step towards reversing the steep discount.
