Better Buy: Bitcoin vs. Grayscale Bitcoin Trust?

Is the Grayscale Bitcoin Trust ( GBTC -1.84% ) a better investment than simply buying Bitcoin ( BTC 0.49% )?

At first glance, it doesn’t matter which direction you take. Closer inspection, however, points to a clear winner in this cryptocurrency duel. Let’s look.

What is the difference?

Bitcoin is Bitcoin – the first, largest and most famous of all cryptocurrencies. It is a digital register of transactions, heavily encrypted to ensure the security and stability of each transaction and managed by a global blockchain system on thousands of computers.

The Bitcoin system was originally designed as a decentralized payment system, spanning national borders and huge distances with low transaction fees and fast execution. These benefits are measured against traditional cash and credit systems, which add significant costs and often hours or days of processing time when the transaction is international.

It is also intended to provide a long-term stable value storage system. There will never be more than 21 million Bitcoins in the market due to the strict limitations of the underlying mining code. It would take a rewrite of Bitcoin’s code to overcome this limit, and the decentralized nature of the Bitcoin community makes this idea very unlikely. This would undermine the value of each bitcoin and the system as a whole, and I don’t see why bitcoin miners and developers would allow that to happen.

So that’s Bitcoin in a nutshell – an ultra-secure transaction system run by a global community.

Image source: Getty Images.

The Grayscale Bitcoin Trust is a different beast. This investment vehicle is managed as an equity trust fund and presented to investors in the form of shares on the OTC market. The trust invests directly in Bitcoin and has no other holdings. This setup is subject to rules and regulations that do not necessarily apply to the naked Bitcoin asset, allowing investors who seek or require regulated securities to invest in Bitcoin through this channel.

There is, however, a downside to the Grayscale Bitcoin Trust. The additional checks and balances of this structure come at a cost, and Grayscale charges a 2% annual management fee. The amount of Bitcoin under the management of the trust is not fixed. The trust held 641,391 Bitcoins in April 2021. Today, the holdings stand at 653,919 Bitcoins. This is a reduction of 2% in 12 months, in line with the management fee of 2% shown.

What do you mean difference affect investor returns?

As a result, confidence tends to lag the basic Bitcoin price chart for an extended period. Here’s how the two investments compare over the past three years, for example. the S&P500 ( ^GSPC -0.27% ) The stock market index is also included here so you can see how crypto investments compare to typical Wall Street returns:

Bitcoin Price Chart

Bitcoin price data by YCharts.

It is important to note that Grayscale Trust stock prices are not tied to a specific fraction of a Bitcoin. If so, the lines on the chart should not have been more than 6% apart during the three-year period shown above. Instead, stock prices are determined by the open market.

The pricing process includes considerations such as additional grayscale vehicle security, pricing structures, management risks, and more. In particular, it seems that investors are placing less importance on trust management features as the cryptocurrency market moves closer to its own regulatory framework. The gap between bitcoin prices and bitcoin-based trust grows every time a cryptocurrency regulatory bill makes its way through Congress.

Who should own Grayscale Bitcoin Trust shares?

The Grayscale Bitcoin Trust still serves a useful purpose for some investors, but it is not a direct replacement for owning Bitcoin. Ultimately, trust becomes less useful and less valuable as the crypto market becomes healthier and more stable.

It’s an unfortunate equation, one that only works in favor of grayscale investors if progress toward sensible legislation slows or hits a brick wall. It is a Bitcoin-based asset for investors who expect the crypto market to encounter legislative issues. And if that’s your view, you might be better off staying out of the cryptocurrency business until the legal and regulatory kinks have been ironed out.

This article represents the opinion of the author, who may disagree with the “official” recommendation position of a high-end advice service Motley Fool. We are heterogeneous! Challenging an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and wealthier.

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