Please ensure Javascript is enabled for purposes of website accessibility

Bitcoin Investment Trust's Premium Has Exploded

By Jordan Wathen - Updated Aug 31, 2017 at 3:03PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Bitcoin Investment Trust, the readily available way for U.S. investors to take a flier on the popular cryptocurrency via their brokerage accounts, is again trading at twice the value of the bitcoin it holds.

Speculators are paying high prices to bet on bitcoin. At the market close on Tuesday, Bitcoin Investment Trust (GBTC -8.56%) traded at a price 101.6% higher than the actual market value of the bitcoin it holds.

That's not a misprint. Shares ended Tuesday at $832.99, even though the value of the bitcoin backing the trust was valued at just $413.16 per share on bitcoin exchanges.

Over the 28 months or so of its existence as an over-the-counter stock, Bitcoin Investment Trust has closed at a premium to net asset value on 589 days. Only once has it traded for a discount: It happened back in 2015, when the closing price valued the trust at a microscopic 0.1% discount to the underlying value of its bitcoin.

Premiums this large, though, have been a rare occurrence for Bitcoin Investment Trust, as you can see in the chart below.

Chart of Bitcoin Investment Trust's premium

Image source: Author. Data from Grayscale Investments, the trust's sponsor.

Something of an anomoly

In properly functioning markets, large premiums to net asset value are whittled away by arbitragers. Arbitragers short the asset trading at a premium (Bitcoin Investment Trust) and buy an equal amount of the underlying asset (bitcoin) at market price.

For example, one might short 100 shares of Bitcoin Investment Trust, and then buy 92.58535 bitcoin. In that situation, the fluctuations in bitcoin are largely irrelevant to the arbitrager: What matters for them is whether the premium increases or decreases. The only way an arbitrager loses is if the premium never closes, closes too slowly, or if the premium expands so rapidly that the arbitrager faces a margin call on his or her short position. 

The problem is that most shares of Bitcoin Investment Trust appear to be in the hands of individual investors, who are unlikely to keep their shares in margin accounts, and even less likely to lend out their shares to short sellers. According to data reported by OTC Markets, only 29,293 shares were sold short as of July 31, 2017. Data from Interactive Brokers suggests that it had only 9,000 shares in inventory to short at that time. These figures are tiny relative to the roughly 1.8 million shares reported to be outstanding earlier this year. 

Chart going up

Image source: Getty Images.

Interestingly, Bitcoin Investment Trust's premium to net asset value seems to be an American-only phenomenon. Overseas, on Nordic exchanges, appetite for bitcoin has been met with an exchange-traded note, which mirrors the changes in bitcoin without substantial premiums or discounts. Of course, given the fact it trades overseas, it's unlikely to steal any significant retail demand from a trust that trades over the counter in the United States.

Eventually, it's my view that Bitcoin Investment Trust's premium to net asset value will go extinct, as a true exchange-traded fund for bitcoin fixes the supply and demand imbalance, investors discover alternatives to buy bitcoin at the market price, or the love affair with all things bitcoin simply dies down. Or some combination of three -- these things aren't mutually exclusive.

No matter how it happens, a shrinking premium will mean pain for Bitcoin Investment Trust's shareholders, who would be more likely to get returns lower than they would if they owned bitcoin directly. Historically, the trust has traded at a median premium of about 40%. Barring a change in the value of bitcoin itself, the share prices of the trust would have to fall by approximately 30% to revert to the median.

Jordan Wathen owns shares of Interactive Brokers. The Motley Fool recommends Interactive Brokers. The Motley Fool has a disclosure policy.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Grayscale Bitcoin Trust (BTC) Stock Quote
Grayscale Bitcoin Trust (BTC)
GBTC
$13.24 (-8.56%) $-1.24
Interactive Brokers Group, Inc. Stock Quote
Interactive Brokers Group, Inc.
IBKR
$62.69 (-1.97%) $-1.26
OTC Markets Group Stock Quote
OTC Markets Group
OTCM
$55.16 (0.28%) $0.15

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
397%
 
S&P 500 Returns
128%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 08/19/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.