So, you are interested in investing in Bitcoin but don’t want to deal with an unregulated and uninsured exchange? Or maybe you just don’t want the hassle of dealing with custody and security issues? If that’s the case, then a Bitcoin trust might be right for you. These investment vehicles are overseen by a digital currency asset manager, use crypto assets to build value, are open to retail investors and allow individual investors to access the crypto market without buying tokens.
A trust is a company that owns a fixed amount of an asset. The asset could be gold or, in this case, Bitcoin. The company stock is tradable on the U.S. stock exchange, with each share representing fractional ownership of the asset held.
Bitcoin trusts satisfy a growing investor’s eagerness to invest in Bitcoin on the stock market. By purchasing shares in a Bitcoin trust, investors can get exposure to Bitcoin without the issues of buying Bitcoin directly.
Grayscale Bitcoin Trust (OTC: GBTC)
GBTC is a closed-end Bitcoin trust that Grayscale runs. GBTC launched in September 2013 and began trading publicly on May 4, 2015. Over the years, the fund has experienced rapid growth. GBTC stock split 91-1 in January 2018, which dropped the amount each share represents from about 0.01 to 0.001 bitcoin. As of April 2021, GBTC held 654,885 Bitcoin — 46% of all Bitcoin held by public companies. Grayscale uses Coinbase Custody Trust Company, LLC as custodian of its Bitcoin.
Grayscale investments are designed to leverage the intrinsic value of Bitcoin, effectively creating a Bitcoin ETf or Spot Bitcoin ETF. This is no different from a traditional investment vehicle, but it is easier to track because only one main asset is used to help the trust grow.
Grayscale is a subsidiary of Digital Currency Group, which is a New York-based crypto venture capital fund. Grayscale Bitcoin Trust trades on an over-the-counter (OTC) market.
GBTC Overview
Assets under management as of 9/1/21: $27.6 billion
Outstanding shares: 692,370,100
Bitcoin holdings per share: $39.82
Each share represents: 0.000936477 bitcoin
Performance since 5/04/15: 8083.5%
GBTC Performance
Osprey Bitcoin Trust (OTC: OBTC)
The Osprey Bitcoin Trust was founded in 2018 and went public on February 16, 2021. The Trust holds Bitcoin as the base asset with shares traded on the open market. Each share of the Trust represents fractional ownership of Bitcoin.
OBTC Overview
Assets under management: $119,044,802
Outstanding shares: 8,340,536
OBTC bitcoin holdings (approx.): 2,836 bitcoins
Each share represents: 0.00034
Custodian: Fidelity Digital Assets Services
Net asset value (NAV): $14.27
GBTC vs. OBTC Fees
Grayscale Bitcoin Trust is a much larger fund with a long history and charges a management fee of 2%. Osprey Bitcoin Trust is the new kid on the block and just a fraction of the size and charges a 0.49% management fee.
Looking at just the management fees, Osprey Bitcoin Trust seems like the better option, but there is more to consider. You need to determine if the shares are trading at a discount or a premium to the net asset value.
Do Bitcoin Trusts Trade Like Stocks?
Shares of both GBTC and OBTC can be purchased and sold through any brokerage account, just like stocks. You can also hold both funds in IRAs and tax-advantaged accounts.
Net Asset Value (NAV) Premiums and Discounts
Net asset value (NAV) is an important metric to determine if a fund is trading at a discount or premium to what the shares are worth. Net asset value can help investors spot potential investment opportunities. It will also tell them if a fund is overpriced (trading at a premium).
To calculate net asset value, take all assets and divide them by the outstanding shares. As an example, see OBTC’s net asset value below.
Total assets = $119,044,802 Outstanding shares = 8,340,536
At the time of writing, OBTC is trading at an 11% discount to NAV, and GBTC shares are also an 11% discount to NAV.
Benefits of Bitcoin Trusts
A Bitcoin trust is perfect for anyone who does not want to buy Bitcoin directly. There are several benefits for an individual who has never had experience with cryptocurrencies.
Here is a list of benefits:
- Because Bitcoin trusts trade on the U.S. stock exchange, there is no need to trade on an unregulated crypto exchange.
- You can buy and sell right from your brokerage account.
- SIPC protects stock brokerage accounts against broker-dealer bankruptcy. Crypto held on an exchange or wallet is uninsured, so you have no recourse if the crypto exchange goes under or gets hacked.
- If you decide to get exposure to Bitcoin through a Bitcoin trust, you don’t have to learn how to safely transfer your cryptocurrencies from the exchange and into your crypto wallet.
- Another benefit is not having to learn how to store your crypto safely. Do you use a hot wallet, a cold wallet, or a paper wallet? Where do you keep your seed phrases and passwords to keep them safe?
- You won’t have to worry about exchange hacks or having your wallet hacked.
- Filing taxes for gains made on shares is much less complex than filing crypto taxes.
Drawbacks of Bitcoin Trusts
Bitcoin trades 24 hours a day, seven days a week. It never stops. Bitcoin trusts are only available during OTCQX market hours, Monday through Friday, from 6 a.m. to 5 p.m. EST. There are also quite a few holidays during the year where the stock market is closed. If the price of Bitcoin dumps overnight or on the weekend, you could face hours or days before you could respond.
Another drawback is that Bitcoin trusts could trade at a significant premium to net asset value for extended periods.
Alternative Ways to Invest in Bitcoin
Besides buying shares in a Bitcoin trust, you could just decide to learn what is necessary to purchase Bitcoin directly. There is no shortage of educational crypto content online; there’s also no shortage of cryptocurrency exchanges. A cryptocurrency exchange works like a brokerage, an intermediary between buyers and sellers.
Coinbase is an excellent exchange. It doesn’t have a sophisticated trading platform that a more advanced trader prefers, but that makes it easier to use, especially for new investors. Coinbase does have a second site, Coinbase Pro, which does offer a more sophisticated trading platform.
eToro is another popular cryptocurrency exchange. The selection of cryptocurrencies isn’t huge at 18, but eToro also offers a social trading platform. On the social forum, traders can discuss trade ideas and trading strategies with other traders.
PayPal (NASDAQ: PYPL) is another easy option for buying bitcoin. PayPal began offering crypto to U.S. users earlier this year. You can buy and sell directly from your PayPal account but cannot transfer or deposit crypto.
Another alternative way to invest in Bitcoin would be to purchase it from a Bitcoin ATM. Currently, 42,266 Bitcoin ATMs are available in the U.S. and have doubled in the last year. As usual, you will want to pay attention to the fees and what price you are paying.
One last alternative is using Swan Bitcoin. Swan Bitcoin is a crypto app that lets you automate Bitcoin purchases. After you open your account, you can set your plan for how much you want to purchase, how often (day, week, month), and the date you want it to start. You have the choice of leaving your Bitcoin with Swan or transferring it out to your wallet.
Sum of median estimated savings and rewards earned, per user in 2021 across multiple Coinbase programs (excluding sweepstakes). This amount includes fee waivers from Coinbase One (excluding the subscription cost), rewards from Coinbase Card, and staking rewards. ³Crypto rewards is an optional Coinbase offer. Upon purchase of USDC, you will be automatically opted in to rewards. If you’d like to opt out or learn more about rewards, you can click here. The rewards rate is subject to change and can vary by region. Customers will be able to see the latest applicable rates directly within their accounts.
Cryptocurrency is offered by eToro USA LLC (“the MSB”) (NMLS: 1769299) and is not FDIC or SIPC insured. Investing involves risk
Don’t invest unless you’re prepared to lose all the money you invest. This is a high-risk investment and you should not expect to be protected if something goes wrong. Take 2 mins to learn more
Investing in Bitcoin vs. Investing in Bitcoin Trusts
You can see that there are many ways to get exposure to Bitcoin. It all comes down to how hands-on you would like to be. A Bitcoin trust is a perfect way to get exposure to Bitcoin for those who prefer a hands-off approach and whose comfort zone is the stock market. Buying from your PayPal account or Swan Bitcoin are also viable options.
You would probably prefer purchasing Bitcoin directly from an exchange if you’re the type who likes a more hands-on approach. Buying from an exchange does require you to commit time and energy into learning how to transfer, store and secure your Bitcoin. You also have to accept the responsibility of keeping your Bitcoin safe. If you make a mistake and lose Bitcoin, there isn’t anyone to bail you out. It’s all on you.
Both options have pros and cons, and each will appeal to someone. What it comes down to is how much time and effort you want to put into your investing.
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About Donald Hancock
Donald’s expertise lies in the technical analysis of both stocks and crypto.