Cboe Global Markets (NYSEMKT:CBOE) will soon list a futures contract for bitcoin, which could be very bad news for Grayscale Investment's Bitcoin Investment Trust (OTC:GBTC) and the people who own it.
Bitcoin Investment Trust has enjoyed a lofty premium to the market value of its bitcoin because it was the only "easy" way to speculate on the price of the digital currency. Each share of Bitcoin Investment Trust is backed by roughly 0.092 bitcoin. Based on current market prices, the trust trades for a price about 70% higher than the underlying value of its bitcoin.
The premium price is a direct result of an imbalance of supply and demand among retail traders, but it makes Bitcoin Investment Trust an unreliable way to profit on the ups and downs of bitcoin. If the premium shrinks, Bitcoin Investment Trust shares could fall in value even if bitcoin goes up in value.
The new (better) way to speculate
Bitcoin futures are a much better way for speculators to profit on the ups and downs of bitcoin's market value. Even people who have small accounts can use Cboe's bitcoin futures to initiate trades with position sizes of just one bitcoin. With a minimum maintenance margin of 30%, speculators can put up just $3,381 to profit on the ups and downs of one bitcoin currently worth $11,270.
Why would any rational speculator pay a 70% premium for bitcoin by purchasing shares of the Bitcoin Investment Trust when the Cboe's bitcoin futures contract enables one to speculate through a brokerage account without paying a large premium?
Many retail stock brokers plan to offer bitcoin futures when they begin trading. TD Ameritrade and Ally Financial's Ally Invest (previously known as TradeKing) will both offer bitcoin futures to their clients, according to Bloomberg, while other brokers haven't commented on whether they will open up the contracts to their clients. Fidelity told Bloomberg it doesn't plan to offer bitcoin futures, an interesting decision given its customers love Bitcoin Investment Trust. The trust ranks as the 10th most-traded stock among Fidelity clients on Monday.
Cboe's bitcoin futures start trading on Dec. 10. CME Group will launch its own contracts by Dec. 18. When that happens, retail investors who have used Bitcoin Investment Trust as an expensive vehicle for speculation may turn to the futures market to place their bets on the digital currency. In such a scenario, Bitcoin Investment Trust shares stand to lose at least 40% of their value should the sky high premium come back to earth.