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Why I'm Still Choosing GBTC Over BITO For Bitcoin Exposure

It's not as ideal as owning physical bitcoin, but if you want to stick with the fund marketplace, here's my case for owning the trust over the futures ETF.

Let's address the immediate reaction of probably many readers when they first read this headline.

Yes, I agree that owning spot bitcoin directly is the best option of all if you want to own crypto. Avoiding things, such as roll costs and discounts/premiums to NAV, are preferable for investors in a vaccum.

But let's face it. There are a great many investors out there who don't want to go the route of opening up a crypto wallet at a place, such as Coinbase, to buy bitcoin. They either believe it's not worth the hassle or it's not safe or whatever reason. I happen to be in the first camp. I just don't know enough about crypto wallets and the process of opening one to feel comfortable with doing it. Sure, I could do the reading and research, but I just don't have the time to do it the right way.

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Therefore, I'm left with choosing between other imperfect options if I want bitcoin exposure. Neither is better than owning spot bitcoin directly. I won't disagree with that. This is geared towards that group of investors who are considering using one of the existing fund products instead.

The two most popular products out there today are the Grayscale Bitcoin Trust (GBTC) and the new ProShares Bitcoin Strategy ETF (BITO). There are a few other products out there as well. The Osprey Bitcoin Trust (OBTC) is similar in structure to GBTC, but comes at a quarter of the cost. The Valkyrie Bitcoin Strategy ETF (BTF) is just a few trading days old and would be the peer to BITO.

Here's the difference. GBTC is a trust that holds bitcoin, but trades like a closed-end fund. Therefore, it can trade at a huge discount or premium to the underlying price to bitcoin, which can either enhance or detract from an investor's total return. BITO is an ETF that holds bitcoin futures contracts. Since it's expected to hold front-month futures contracts (although it's had to diversify into second-month contracts lately due to high demand and contract holding limits). It's expected to track pretty closely to bitcoin prices, but ongoing roll costs are likely to make it a laggard to spot bitcoin over time.

GBTC vs. BITO

GBTC's biggest drawback is how much its market price can deviate from the actual value of the portfolio. Back in 2018, investors were paying, at times, as much as a 100% premium to the underlying price of bitcoin. In other words, they were paying $2 for every $1 bitcoin exposure. That's just not a smart way to invest and anyone who invested at that peak has seen little return on their investment despite bitcoin pushing $60,000.

Screen Shot 2021-10-28 at 8.40.28 AM

That premium has consistently shrunk over time. Early in 2021, GBTC still traded at as much as a 20% premium. Today, it trades at a 17% discount and that has severely impacted its return. Year-to-date, bitcoin is up 100%. GBTC has only returned 52%.

This is GBTC's biggest risk - not keeping up with the returns of bitcoin, but it may also be its biggest benefit.

BITO isn't likely to see those big swings in relation to bitcoin's price, but it is likely to see a drag over time. The cost of rolling from one contract into the next typically comes with a cost and that will decay the value of BITO over time. On the plus side, the price of the futures contract is likely to track pretty closely to the price of spot bitcoin.

It's a little difficult to see in the chart below since BITO trades only during market hours and bitcoin trades around the clock (and there's very limited data to work with), but the correlation is clear.

BTCUSD_2021-10-28_09-54-19

So those are the two choices for fund investors - the trust that holds bitcoin but whose price can fluctuate significantly over the one that holds bitcoin futures but tends to track more closely.

Why I'm Choosing GBTC Over BITO

Here's my argument.

Grayscale has already announced its intention to convert GBTC into an ETF. Why does this matter? It would likely shrink that 17% discount down to nothing upon conversion. I don't want to get too far into the weeds, but the share creation/redemption mechanism that exists for ETFs allows them to trade almost in lock step with their underlying portfolio. This doesn't exist with GBTC in its current format because the trust has a fixed number of shares. It may have a calculable value at any given time, but the market price is whatever investors are willing to pay for it.

For that reason, I'm holding on to GBTC in anticipation of the current discount closing.

Now, to be fair, it could be some time before this happens. The SEC has approved a bitcoin futures ETF, but it has also shown no inclination that it's ready to approve a physical bitcoin ETF. It's simply uncomfortable with the idea approving an unregulated asset in an ETF wrapper usually citing the greatest hits - potential for fraud, manipulation, etc.

It also requires the faith that Grayscale will follow through on its plans to convert to an ETF. Right now, GBTC is in a fairly enviable position. It's got nearly $40 billion in assets in a product that charges 2% annually. Does Grayscale really want to mess with such a cash cow? It might need to in order to compete since a spot bitcoin ETF would be far superior to a bitcoin trust in terms of structure. But would a lot of money flow out of GBTC and into new spot bitcoin ETFs? That's the big question and the answer could be "maybe not". If there aren't significant outflows, Grayscale could actually benefit from keeping GBTC just the way it is, in which case the discount may never disappear.

There are a lot of variables still at play and betting on an ETF conversion that closes the discount is not a sure thing. But in the meantime, I'm probably still capturing most of the price movement of bitcoin in case the price keeps heading up. Even though it likely won't be as correlated with bitcoin's price as BITO would be, it's still correlated.

That and the potential to capture that discount closing in time is why I'm still hanging on to GBTC over BITO.

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