2,800 in May, otc markets gbtc bitcoin latest milestone in what’s become a parabolic move higher. But as incredible as those moves have been, the performance of one bitcoin fund makes them look paltry by comparison. 224 million at the beginning of the year. GBTC is an “open-ended trust” and the first publicly traded bitcoin investment vehicle.
The share price of GBTC was last trading at double the value of its underlying bitcoin holdings. GBTC’s premium to its net asset value is astronomical by any measure, and close to the highest level it’s ever been. For investors buying into the fund, such large premiums are a disaster waiting to happen. Premiums are a fickle thing, and can fluctuate wildly depending on the supply and demand for shares. For investors used to buying exchange-traded funds, such large premiums are almost unheard of.
When a premium becomes large, authorized participants will buy up the underlying, deliver it to the ETF provider in exchange for ETF shares, and sell them for a profit, pushing the ETF market price back towards the fund’s NAV. Up until early this year, share creations for GBTC took place through private transactions with accredited investors. Those new shares were subject to a one-year lockup period before they could be sold on the public market, hindering the ability to arbitrage any premium above NAV. Meanwhile, redemptions for GBTC have been completely suspended since 2016 after the trust and its AP were found to be in violation of an SEC rule. Put that all together and you have a product that can’t be considered an ETF even by the loosest definition. Grantor trusts, ’40 Act funds, ’33 Act commodity pools and even ETNs are often lumped together under the ETF umbrella.
They all hold securities with a fluid, unrestricted creation and redemption mechanism that serves to keep the traded price close to the underlying fair value. Even with its flaws, clearly there’s been a lot of demand for GBTC. 1 billion and even counts two ETFs among its holders: the ARK Web x. For investors who don’t want to go through the hassle and risk of buying bitcoin directly from a digital currency exchange and storing it themselves, GBTC is, in many ways, the only game in town. But it doesn’t have to be. The commission didn’t allow the ETF to see the light of day because it was concerned about the lack of regulation in bitcoin markets, which could harm investors.