2023-12-15 09:00:37 ET
Summary
- Grayscale Bitcoin Trust aims to convert into a Bitcoin Spot ETF to increase capital inflows and annual fee revenue.
- The GBTC discount has almost closed due to excitement about Bitcoin Spot ETF application approvals.
- The 2% annual fee charged by Grayscale could trigger outflows as competitors offer the same product for lower fees, posing a risk to GBTC's upside.
Grayscale Bitcoin Trust ( GBTC ) is one of the easiest ways to invest in Bitcoin without actually owning BTC on a third-party crypto exchange or cold/hot crypto wallet.
Grayscale holds 620,170 Bitcoin in GBTC and charges you a 2% annual fee to keep custody of the Bitcoin. According to Coindesk , GBTC is a closed-end fund instead of a traditional ETF. The only way you can make a profit is to sell your GBTC shares on the open market.
However, Grayscale wants to convert GBTC into a Bitcoin Spot ETF , which would allow them to uplist GBTC on the NASDAQ or NYSE and potentially increase capital inflows and retail investor interest.
Bitcoin is up 149% in 2023, and GBTC has benefited from renewed interest in cryptocurrencies.
Back in November 2022, Sam Bankman-Fried's FTX exchange collapsed and caused a massive crash in Bitcoin's price to a low of $15,000.
The FTX crash signaled the bottom of the crypto bear market, which caused GBTC's discount to reach an astounding 48%. That means there was a 48% gap between the amount of Bitcoin per share and GBTC's market price.
Astute investors pounced on this arbitrage opportunity, but now, the GBTC discount is almost closed due to excitement about several Bitcoin Spot ETF application approvals.
Crypto investors have become so bullish on these Bitcoin Spot ETF approvals that the GBTC price has spiked well over $30 over the last few weeks.
However, I'm worried that Bitcoin speculators have driven up the price of GBTC to an overbought range.
Bitcoin's Epic Run in 2023 Needs a Pullback
Nothing lasts forever, and all new crypto stock investors should prepare for massive pullbacks when Bitcoin gets overbought. I've noticed everyone talking about Bitcoin on TV and social media as excitement roars leading up to the Bitcoin halving.
However, you don't want to invest in crypto stocks when everyone at work and school is bragging about them. Beginner retail investors are usually extremely late to Bitcoin when BTC prices become exceedingly high.
FOMO (fear of missing out) is a real thing, and crypto stocks soar once FOMO kicks in overdrive.
The GBTC weekly RSI chart sits at 75, which indicates that GBTC shares are extremely overbought.
Institutional investors such as ARK Invest have begun selling massive blocks of GBTC shares to cash in profits. After soaring nearly 300% YTD, Grayscale Bitcoin Trust is due for a short-term correction.
Grayscale's 2% Annual Management Fee Could Trigger Outflows
I was hoping that Grayscale would lower its 2% annual fee upon approval of its Bitcoin Spot ETF application, but that wasn't the case. Grayscale plans to charge one of the highest Bitcoin Spot ETF fees on Wall Street, even though several competitors will offer the same product for much lower fees.
BlackRock will probably charge a smaller expense ratio than Grayscale does to entice new investors. Why would investors pay more to Grayscale if BlackRock and other institutional firms offer the same product offering for less?
You pay Grayscale a 2% annual fee to do absolutely nothing but hold BTC in cold storage. The problem is that a 2% annual fee can erode the value of your portfolio greatly over time.
The funny thing is that Grayscale expects a massive inflow of capital into Bitcoin upon approval, while several Wall Street analysts believe the exact opposite.
Will GBTC be forced to lower its fees due to massive outflows, or will investors pay nearly twice as much to Grayscale for doing nothing but holding BTC?
No one knows for sure, but this is a serious problem that makes me less confident in holding GBTC over the next few months.
Risk Factors
- Massive Outflows : Crypto investors may dump GBTC and buy another Bitcoin Spot ETF (if approved) because GBTC's fees are too high. Grayscale benefits from its hefty fees because investors don't have many options available now. If the SEC approves multiple Bitcoin Spot ETF applications, then investors will be able to compare all of these ETFs based on fees alone. I guess that Grayscale will see significant outflows and be forced to lower its fees. It's a major risk that could limit GBTC's upside even if Bitcoin pumps in early 2024 leading up to the April 2024 Bitcoin halving.
- Bitcoin Spot ETF Rejection : You never know what SEC Chair Gary Gensler will do. I don't think it's likely, but there is a possibility that Grayscale's application is denied. A recent anti-money laundering crypto bill from Elizabeth Warren wants to put strict restrictions on the crypto industry, while JPMorgan Chase CEO Jamie Dimon thinks the government should ban Bitcoin. It's obvious that crypto investors want these Bitcoin Spot ETFs, but nobody knows if and when they will get approved.
- Erosion of Capital Due to Fees : As I mentioned earlier, management fees erode your capital and reduce your investment returns over time. A 2% fee is a lot of money throughout 10 to 20 years. If you plan to hold GBTC in your retirement, then be prepared for less money when you retire.
- Bitcoin Discount Narrowing : I could be wrong and Bitcoin may continue soaring as we approach the beginning of 2024. That would cause the GBTC discount to narrow, which could cause a GBTC premium if investors FOMO into GBTC before other Bitcoin Spot ETF options are available.
- Rising Bitcoin Prices : Bitcoin is up 12% so far in December 2023 and could continue going up in price, which would increase the GBTC's price as well.
I'm Avoiding GBTC for Now
I sold all of my GBTC holdings for a nice profit and plan on waiting for this Bitcoin Spot ETF decision over the next few weeks.
Instead of GBTC, I plan on purchasing more Bitcoin ( BTC-USD ) and buying other crypto-related stocks such as MicroStrategy ( MSTR ) and Marathon Digital ( MARA ).
I'm not interested in paying a 2% annual fee when the GBTC discount disappears. It doesn't make any sense to pay that much when there will be cheaper alternatives available in 2024.
GBTC isn't the best way to invest in Bitcoin, but I think it's worth buying if you don't mind the 2% annual fees.
For further details see:
Grayscale Bitcoin Trust: Sell Into The Bitcoin Spot ETF Hype