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PRIVATE KEY

Grayscale’s bitcoin fund is trading for 33% more than it should

An employee sorts gold bars in the Austrian Gold and Silver Separating Plant 'Oegussa' in Vienna.
REUTERS/Leonhard Foege
You can’t bite bitcoin.
By Matthew De Silva
Published Last updated This article is more than 2 years old.

The race to make cryptocurrency trading convenient has suffered through fits and starts. Although buyers can now easily sign up for dedicated crypto exchanges, such as Coinbase and Gemini, general-purpose brokerage companies have slowly realized the market’s potential, too, especially as a device to attract new, young customers.

Since February of 2018, users of Robinhood, a mobile stock trading platform, have been able to trade cryptocurrencies, including bitcoin and ether. Fidelity, another financial services company, reportedly will add crypto trading sometime in the next few weeks, and E-trade also plans to dive into digital currencies soon.

As more mainstream financial institutions join the crypto wave, they’re gradually sliding bitcoin next to conventional investment vehicles, like stocks and bonds. Bitcoin, a digital currency, is out of place here. The cryptocurrency doesn’t pay dividends or coupons, and it will never generate positive cash flows like the companies represented by shares. It doesn’t create, well, anything—except occasional offshoots cryptos, like bitcoin cash.

At the end of the day, a bitcoin is worth only what somebody else is willing to pay for it. Aswath Damodaran, a professor of finance at New York University, has explained as much.

One of crypto’s greatest draws is its volatility, explained one former foreign exchange trader. The arbitrage opportunities available in the bitcoin market are second to none.

There’s perhaps no greater example of crypto mis-pricing than Grayscale’s Bitcoin Trust (GBTC). Grayscale is a digital asset management firm which packages cryptocurrency funds and sells them to retail investors, who trade them as over-the-counter securities. Its financial product GBTC is intended to track bitcoin’s price, currently $5,760. The fund has approximately $1.2 billion in assets under management, and has issued nearly 230 million shares, each of which corresponds to a fraction of a bitcoin—0.00098247 bitcoins to be exact. Grayscale also charges a 2% management fee, which is unusually high compared to the fees charged by mutual fund managers and index fund providers.

With some simple arithmetic, shares in GBTC should (logically) trade for about $5.65—that’s $5,760 per bitcoin multiplied by 0.00098247 bitcoins per share. Of course, we must allow some margin of error, to adjust for the management fee. But, in reality, GBTC trades for $7.50 per share, almost a 33% premium. Here’s how that implied price matches up against buying through a crypto exchange.

GBTC buyers believe the premium is justified because the Grayscale fund is responsible for securing the underlying bitcoin (i.e., protecting the private keys, or unchangeable passwords, that are required to spend money from a wallet address). The 33% premium has persisted as uninformed buyers bid up the price of GBTC shares.

“GBTC is much more accessible [than] Bitcoin because I don’t have to manage any private keys,” said Damien Del Russo, a crypto buyer and independent IT consultant. “They manage their keys and I have shares. It does feel safer to me, even if it is not.” Although Grayscale has wrapped bitcoin into something more palatable for mainstream consumers, a share in GBTC doesn’t offer something uniquely valuable to buyers, except maybe the chance to see bitcoin holdings trading next to stock holdings. Del Russo said he currently owns GBTC shares through Fidelity.

“I see the premium eventually dropping to 1% to 5% within a couple years as competitors enter the market,” he said of GBTC. Indeed, if companies like Fidelity and E-Trade eventually sell crypto directly to the public, then the premium on GBTC may diminish—or even disappear altogether.

Perhaps sensing the moment, Grayscale has begun a concerted ad campaign—#DropGold—to attract new buyers.

As a cherry red Lamborghini races through the streets, Grayscale asks “Why did you invest in gold? Are you living in the past?”

“For us, #DropGold is our ‘Got Milk,” Barry Silbert, CEO of Digital Currency Group—GrayScale’s parent company—told Yahoo. “This campaign is first and foremost focused on starting a conversation about bitcoin versus gold. If the ad makes people want to get into bitcoin, we’re completely indifferent about how they go about doing it.” Silbert is targeting gold because he, along with other crypto enthusiasts, claim bitcoin stores value like a digital version of the precious metal, and that its price will rise over time due to the cryptocurrency’s deflationary monetary policy.

Regardless of how they view bitcoin though, buyers should be thoughtful about how they purchase it. Buying through a crypto exchange requires a little more effort, but you won’t be paying a premium. Take advantage of the liquidity and price discovery of the broader bitcoin market.

🔑🔑🔑

What you need to know—and why

Bitfinex prices suggest a flight to safety

As New York’s Attorney General scrutinizes iFinex—the parent company of Bitfinex, a crypto exchange, and Tether, a dollar-pegged digital token—cryptocurrency prices have jumped on the exchange. On Bitfinex, bitcoin trades for about $280 more than the global average. Ether trades for $10 more. These discrepancies have reportedly prompted CoinMarketCap, a crypto price tracking website, to exclude Bitfinex from its price calculations.

Takeaway: While it may seem tempting to flip cryptos for profit on Bitfinex, the exchange is in a precarious situation. New York’s Attorney General has lasered in on a questionable loan that was provided to the exchange by its affiliate, Tether. The price of bitcoin may be temporarily elevated on Bitfinex because traders are rapidly moving out of Tethers. ↘️

Please send news, tips, and premiums to privatekey@qz.com. Today’s Private Key was written by Matthew De Silva, and edited by Oliver Staley. A cynic is a man who knows the price of everything, and the value of nothing.

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