GBTC: Everything You Need To Know About The Grayscale Bitcoin Trust

Grayscale’s two-year battle to launch a Bitcoin spot exchange-traded fund (ETF) may finally be turning a corner. On August 29, 2023, the United States Court of Appeals for the DC Circuit sided with Grayscale over the U.S. Securities and Exchange Commission (SEC) in the crypto firm’s quest to launch a Bitcoin ETF. The price of Bitcoin rose significantly following the news.

The Grayscale Bitcoin Trust (GBTC), which was launched in 2013, enables investors to trade shares in trusts that hold large pools of Bitcoin, with each share priced at near-enough the price of Bitcoin. As of August 2023, it has over $16 billion assets under management.

Back in 2021, it had announced plans to to turn the GBTC into a Bitcoin ETF, which could be traded “like a stock on a national securities exchange, such as NYSE Arca or Nasdaq,” in the words of Craig Salm, Grayscale’s Chief Legal Officer.

In June 2022, the Securities and Exchange Commission (SEC) rejected Grayscale’s ETF application, citing similar reasons given for other rejections for Bitcoin ETFs: that the product failed to protect the public’s interest.

As of August 29, 2023, GBTC trades at $20.40.

How does the Grayscale Bitcoin Trust Work?

The Grayscale Bitcoin Trust is similar in structure to a closed-end fund. Large institutional investors wire Grayscale some money (or some Bitcoin), then Grayscale invests that money into Bitcoin and sells shares in the trust on the stock market. It’s one of the only ways that US investors can gain exposure to Bitcoin through the stock market.

Shares in the fund can trade at either a premium or a discount to the actual price of Bitcoin. Historically, they’ve almost always traded at a premium. This is good news to Grayscale and its investors, who earn money from that premium, but bad news for investors.

So, why would investors buy shares in GBTC instead of just buying Bitcoin outright? There are a couple of reasons:

First, investing in a Bitcoin Trust allows people to gain exposure to Bitcoin without having to worry about how to store it, complying with the law or filing separate taxes.

If you’re buying Bitcoin, you have to manage a laundry list of concerns: How do you store it? Do you need to pay someone to hold custody over your Bitcoin? What happens if you lose the key or your Bitcoin wallet is hacked? As a publicly-traded trust, which reports to the US Securities and Exchange Commission (SEC), the Grayscale Bitcoin Trust makes this easy to forget about.

Second, publicly-traded Bitcoin trusts come with various tax advantages. Certain IRA, Roth IRA and other brokerages and investor accounts that won’t give tax breaks on investments of Bitcoin, will give them for investments of publicly traded trusts. Grayscale’s Trust provides those investors with exposure to Bitcoin in a tax-friendly way.

Third, crypto trading is very insular. You can’t trade Bitcoin against stocks in Tesla and Apple (without using crypto stock-derivatives platforms). That cuts off the crypto economy from the traditional one. However, as soon as you list Bitcoin on the stock exchange—albeit in a very expensive, limited way—traditional investors can invest in the crypto economy.

Grayscale also offers several other exchange-traded products—although its Bitcoin product is by far the largest. It also has an Ethereum Trust, with nearly $5 billion assets under management; other funds include Decentraland, Chainlink, and Foilcoin.

GBTC vs Bitcoin ETF

For a long time, Grayscale’s model has benefitted from the absence of a Bitcoin ETF, or exchange-traded fund. To invest in a Grayscale Bitcoin Trust, you’re buying up shares in a trust; with an ETF, you’re investing in a fund that directly tracks the price of Bitcoin.

In the US, the SEC has denied multiple applications for a Bitcoin ETF on the grounds that Bitcoin’s price can be manipulated. While US investors wait for a Bitcoin ETF—one that the SEC may never approve—Bitcoin trusts are the next best thing.

This is an update of an article originally published on April 9, 2021.