Over the weekend, bitcoin prices surged nearly 20% to reach a new all-time high. But those who own the Bitcoin Investment Trust (GBTC 1.61%) haven't seen their shares rise in kind. Bitcoin Investment Trust is up about 8% as I write this article, less than half of bitcoin's gain over the weekend.
Bitcoin Investment Trust is best explained as a bitcoin closed-end fund. Each share represents ownership of roughly 0.0926 bitcoin. Because the supply of Bitcoin Investment Trust stock doesn't expand in proportion to demand, shares frequently trade at a premium to the value of the bitcoin that the trust holds.
As I write this, shares trade at a 63% premium to the value of the underlying bitcoin, down from the 82% premium at market close on Friday. Due to the declining premium, shares of Bitcoin Investment Trust have failed to match bitcoin's recent gains.
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Compressing premiums
The Bitcoin Investment Trust reached an all-time closing high of $546.45 per share on June 6, when bitcoins traded for about $2,900 each. Since then, bitcoin prices have rallied even higher to a current price of $3,380 each. Shares of the Bitcoin Investment Trust, however, have declined in value since early June.
The disconnect is due to Bitcoin Investment Trust's shrinking premium. Bitcoin Investment Trust traded at a 109% premium on June 6. Today, that premium stands at just 63%. In effect, the value of bitcoin held by Bitcoin Investment Trust has gone up, but the premium that investors are willing to pay has gone down.
Bitcoin Investment Trust's premium to net asset value is not a permanent fixture. In fact, it is probable that at some point in the future the premium could fall all the way to the single-digit percentages, if not all the way to zero.
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That's because Bitcoin Investment Trust and its sponsor, Grayscale Investments, along with the Winklevoss twins and other asset managers, want to create bitcoin ETFs that would create and redeem new shares so that the price of the ETF always trades within a small premium or discount to the underlying value of bitcoin.
If you can buy a competing bitcoin ETF and avoid a premium, why would anyone pay a 60% premium for the Bitcoin Investment Trust?
Should a bitcoin ETF earn the SEC's approval, the premium price that Bitcoin Investment Trust currently enjoys would evaporate. Bitcoin Investment Trust's premium to net asset value dropped to the single digits earlier this year when it seemed more likely that regulators would rubber stamp plans to make a true bitcoin ETF. When the Securities and Exchange Commission struck down the Winklevoss twins' plan for a bitcoin ETF, Bitcoin Investment Trust surged to new highs.
As I wrote on May 25, Bitcoin Investment Trust remains the worst way to buy bitcoin because of its substantial premium to net asset value. Bitcoin prices would have to rally to more than $5,500 per bitcoin for Bitcoin Investment Trust's current share price to be justified.
Buyer beware. Speculators stand to lose as much as 40% of their investment if Bitcoin Investment Trust's premium falls to zero.
