Bitcoin has soared in value, and investors are looking for ways to get in on the craze. The Bitcoin Investment Trust (NASDAQOTH:GBTC) has quadrupled in value just since April, dwarfing even the big run-up in the price of bitcoin itself.
Yet the bitcoin ETF carries with it considerable levels of risk, and even Grayscale Investments, the company that runs the fund, has disclosed plenty of concerns that investors should have before deciding to invest.
Risk factors with Bitcoin Investment Trust
These are the risk factors that Grayscale has brought to investors' attention:
- Regulatory changes could limit bitcoin use or affect the fund's ability to invest.
- The U.S. and other countries could outlaw bitcoin use.
- Additional regulations could impose new costs and responsibilities on the ETF, leading either to higher investing costs or to the ETF's decision not to continue.
- Shareholders don't have the same protections that apply to funds registered under the U.S. Investment Company Act.
- The fund is no longer redeeming shares of the fund directly, which could affect liquidity.
- Bitcoin valuation fluctuations could adversely affect investment in the shares.
- The current price of bitcoin could reflect speculation regarding future appreciation and momentum investing.
- Bitcoin exchanges are volatile, new, and largely unregulated and therefore could be more prone to fraud or failure than other types of securities exchanges.
- The index that the fund uses is new, and its calculation method could adversely affect bitcoin prices.
- The fund sponsor has relationships with the index provider that could lead to a favored relationship between the two parties.
- The methodology for pricing bitcoin for the fund's purposes is new and untested.
- The fund custodian withdraws bitcoin from the fund to pay for costs. If bitcoin values fall, the fund will need to redeem more bitcoin to pay for dollar-denominated expenses.
- U.S. tax rules are uncertain and could change.
- Passive management of the fund could lead to losses than active management might have avoided.
- The fund is concentrated entirely in bitcoin.
- The custodian of the fund could become insolvent, possibly leading to potential losses.
- The fund does not intend to ensure its bitcoin assets.
- The fund might not be able to recover losses if bitcoin are stolen, lost, or destroyed.
- Unknown technical vulnerabilities could jeopardize bitcoin.
- Fund shareholders lack the rights that investors in other vehicles have.
- Banks might choose not to accept bitcoin or provide services to businesses that accept bitcoin.
- Crises could lead to large sales of bitcoin, depressing the price.
- Alternatively, crises could lead to big purchases of bitcoin, lifting the price temporarily, but setting the stage for bigger future declines.
- The impact of geopolitical events on bitcoin supply and demand is uncertain.
- Popular use of bitcoin is limited currently, and future acceptance of bitcoin from merchants is uncertain.
- Arbitrage-related activity could adversely affect fund shareholders.
- Competing bitcoin ETFs could affect the value of the fund's shares.
- The fund custodian owes no fiduciary duty to shareholders and need not act in their best interest.
- The fund might be required to dissolve and liquidate at an inopportune time.
- The withdrawal of authorized participants to create fund shares could affect the fund's liquidity.
- No FDIC or SIPC protection applies to bitcoin assets.
- Bitcoin could be stolen, lost, or restricted from transfer.
- Loss of private keys to access bitcoin could be irreversible and create fund losses.
- Incorrectly transferred bitcoin might be irretrievable.
- Amendments to bitcoin network protocols and software could hurt the fund.
- Damage to the bitcoin network due to open-source vulnerabilities could hurt the fund.
- Malicious actors could gain access to source code and blockchain records.
- Transaction fees associated with bitcoin creation and use could rise.
- Reduction in mining interest could increase the probability of malicious actors gaining control of the bitcoin network or blockchain.
- Delays in recording transactions could reduce confidence in bitcoin.
- Blockchain forks resulting from disparate software patches or upgrades could create an adverse environment for bitcoin.
- Intellectual property claims could force the termination of the ETF.
- Other investors in bitcoin could adversely affect the market.
- The fund's liability is limited in the event of problems that arise.
- The fund sponsor has no meaningful history of operating an investment vehicle like the fund.
- Unanticipated operational problems could arise.
- Potential conflicts of interest could be detrimental to the fund.
- Shareholders aren't allowed to bring derivative actions against the fund.
- There's no guarantee of there being an active market to buy and sell fund shares.
- The fund has put a maximum of $600,000 toward annual costs of public trading of shares and will pass through any additional costs to fund shareholders.
- Restrictions of transfer and redemption could create losses.
What risks should you worry most about?
Of these, the most important involve the way the fund works and the nature of the bitcoin market generally. Most sophisticated bitcoin investors are largely comfortable with the risks involved with bitcoin itself, including the possibility that the blockchain could become vulnerable to manipulation and the closure of established bitcoin exchanges. Yet those who are getting into bitcoin simply because of its price run-up might not understand the technical details and therefore might be surprised to learn that simple mistakes like losing a private key could result in massive losses for the fund.
In addition, the fact that the Bitcoin Investment Trust trades over the counter and with limited liquidity raises key risks. For instance, last Friday, the ETF traded at around $500 per share. But based on the $2,800 price of bitcoin that prevailed at the same time, the proportional amount of bitcoin that each share represented was only about $260. In other words, shares of the ETF traded at a more than 90% premium to the underlying value of the bitcoin that the fund held. Even if bitcoin stays at current levels, fund shares could fall if that premium disappears.
Many people are looking for ways to invest in bitcoin to take advantage of its current surge, and the Bitcoin Investment Trust is a vehicle that many investors feel more comfortable using than a direct purchase of bitcoin through an exchange. Yet with all the risks that the operator of the ETF has identified openly to investors, you should make sure you know exactly what you're getting into before you consider buying shares of Bitcoin Investment Trust.