GBTC vs. Bitcoin: Which is Better?

GBTC vs. Bitcoin: Which is Better?

GBTC vs. Bitcoin: Which is Better?

Are GBTC and BTC the same thing? How are they different? In this article we’ll compare GBTC vs. Bitcoin, why GBTC is useful for institutional investors and what you should know before you buy GBTC and/or BTC.

In this article

    Is GBTC the Same as Bitcoin?

    GBTC is not the same as Bitcoin. GBTC is an investment trust or fund which buys and secures Bitcoin on your behalf. When you buy GBTC, you are buying shares of the trust.

    On the other hand, when you buy Bitcoin, you directly buy the cryptocurrency Bitcoin (BTC) and not shares in a Bitcoin investment trust.

    Grayscale BTC Trust 101 and Why it’s Important

    The Grayscale Bitcoin Trust is important because it’s the only way to “buy” Bitcoin within the confines of the traditional financial system. Bitcoin bought via GBTC can be added to an IRA which can provide investors with certain tax advantages.

    Also, GBTC is available through traditional brokerages rather than a crypto exchange. Thus Grayscale is a good deal for someone who doesn’t know how to set up a Bitcoin wallet but who believes in Bitcoin and wants to buy it without the responsibility of securing their own BTC.

    One of the key advantages of GBTC is that it’s actually backed up by Bitcoin!

    The Grayscale trust buys Bitcoin and they’ve been in the news recently. Reports have emerged which show that Grayscale is buying up more Bitcoin than all of the miners are producing since the halving.

    Grayscale’s director of investor relations, Ray Sharif-Askary, has even gone on record stating that GBTC is experiencing record levels of demand.

    That’s good for Grayscale and good for Bitcoin. However, if possible it’s still better to buy and hold your own Bitcoin versus buying GBTC. Here’s why.

    Buying GBTC vs. Buying Bitcoin

    There are three problems with GBTC. These problems don’t mean that GBTC is a scam or some kind of horrible financial product, it’s not. However, buying Bitcoin is always a better option than buying a financial product. Here’s why.

    1. Grayscale charges a 2% annual fee to own GBTC. Holding Bitcoin is free.
    2. Grayscale is nested within the traditional financial system. If that goes down, is shut down, experiences problems, etc., you lose access to your GBTC. Bitcoin maintains constant uptime.
    3. GBTC trades at a premium over the spot price (current price) of BTC. More on this in a later section.

    So while Grayscale does provide some tax advantages, it’s altogether better to just own the underlying Bitcoin. One of the best ways to buy Bitcoin for the first time is with the Cash App or Coinbase, two platforms widely available for those who want to buy Bitcoin with fiat currencies like dollars or euros.

    (Here are some other places we recommend for users looking to buy crypto with fiat)

    Once you’ve bought your Bitcoin, the best place to store it is with the Exodus Bitcoin wallet. Exodus is a user favorite because it has:

    From left to right: Exodus on Trezor, mobile, and desktop. Download Exodus here

    What is the Premium of GBTC to Bitcoin? (GBTC price vs. Bitcoin Price)

    GBTC trades at a premium over the Bitcoin spot price. As this article is being written, one share of GBTC trades for $12.82. Since 1,000 shares of GBTC is equal to a single Bitcoin, we can see that buying one Bitcoin’s worth of GBTC will cost $12,820. Bitcoin’s spot price is currently $11,165. That gives us roughly a 15% premium to buy GBTC vs. Bitcoin.

    Although this sounds bad there is one caveat: GBTC trades at a fairly reliable premium. Buy GBTC at a 15% premium and you’ll probably be able to sell it at the same premium later on. Where the premium starts to deviate though is in a bull market (prices going up constantly).

    Near the peak of the 2017 bull market, GBTC was trading for almost a 100% premium over the spot price of BTC!

    Imagine buying GBTC at that valuation. Not only would you experience the 85% drawdown in Bitcoin price, you would also experience the drawdown from a 100% premium to a 20% premium. A tremendous, tremendous loss.

    Because the premium changes based on supply and demand, it’s important to account for how it can affect your returns.

    If you buy GBTC during record low premiums over spot, you might be able to make money by selling later when the premium rises. Conversely, if you buy GBTC when the premium is high, you might lose money if you sell when the premium is lower.

    GBTC chart vs. Bitcoin Chart

    The easiest way to track the price of GBTC is via TradingView. They have an excellent, easy to use chart. Also, it should be pointed out that GBTC functions like a traditional financial product in that it doesn’t trade during off-hours. That’s opposed to Bitcoin which trades 24/7.

    Alt GBTC vs. Bitcoin Chart
    The GBTC/USD chart on TradingView. Notice the GBTC premium over the spot price of Bitcoin. Image credit: TradingView

    GBTC vs. Bitcoin ETF

    The biggest difference between GBTC and an eventual Bitcoin ETF (fingers crossed for 2021!) is that a Bitcoin ETF would actually track the price of Bitcoin; an ETF wouldn’t trade for a premium over the spot price of Bitcoin. That would take away a lot of the risk associated with trading GBTC.

    Why Does GBTC Trade at a Premium?

    Another advantage of an ETF is that it would increase competition. Currently, GBTC is the only legally allowable way to trade BTC via the traditional financial market. This is part of the reason why it trades at such a premium.

    Also, that lack of competition allows GBTC to charge high fees. A couple of Bitcoin ETFs would add competition to the industry which would drive down fees.

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    Moving Forward with Grayscale

    It would be easy to demonize Grayscale as a strange financial product that costs too much and encourages people to not take custody of their own Bitcoin. However, altogether Grayscale is a net positive for the Bitcoin ecosystem. There are two main reasons why.

    1. Grayscale is actually backed by Bitcoin! This guarantees the safety of the product and also leads to an increase in the Bitcoin price as GBTC buys up the market.
    2. Grayscale allows people unfamiliar with technology to invest in crypto. No matter how simple Bitcoin may seem to those in the crypto community (and to those who use Exodus 😉), for someone who thinks logging into Facebook is a big deal, Bitcoin is hard!

    When comparing GBTC vs. Bitcoin, Bitcoin comes out ahead in terms of fees, price (no premium), and security (decentralization over centralized financial systems).

    Nevertheless, someone unfamiliar with technology can still appreciate the monetary benefits of Bitcoin and want some exposure to BTC. For now, Grayscale provides a way to gain that exposure in a way that everyday people can understand and trust.

    This content is for informational purposes only and is not investment advice. You should consult a qualified licensed advisor before engaging in any transaction.