Bitcoin Investment Trust (NASDAQOTH:GBTC) is a bad way to speculate on the price of bitcoin.
The trust owns approximately 0.092 bitcoins for each share outstanding. In theory, the trust should rise in value when bitcoin rises, and fall in value when bitcoin drops.
In the real world, things work differently. Using historical data at the market close, I find that Bitcoin Investment Trust and bitcoin move in opposite directions frequently from one market close to another:
- When the price of bitcoin increased, the trust's price increased only 66.5% of the time.
- When the price of bitcoin decreased, the trust's price decreased only 68.8% of the time.
That means that if you buy Bitcoin Investment Trust at market close today and sell it at market close tomorrow, there is a greater than one-in-three chance that if bitcoin's price goes up, you'll be holding a loss. Of course, this means that sometimes you can get lucky, earning a gain on the Bitcoin Investment Trust on a day bitcoin declines in a value. That happens rather frequently -- about one in eight trading days, on average.
Why does Bitcoin Investment Trust do such a bad job of following bitcoin? It's simple supply and demand. The supply of Bitcoin Investment Trust shares is relatively constant, increasing at a snail's pace over time. Demand for its shares can shift wildly, however. On any given day, this trust can rank as the most popular stock at brokerages like TD Ameritrade and Fidelity. When bitcoin surges, demand for the trust generally follows.
The imbalance of supply and demand results in a premium price for the trust. On the median day, shares of the trust closed at a price 42% higher than the underlying value of their bitcoin. This premium was as high as 132.6% in May 2017, and as low as -0.1% in October 2015.
If instead of buying Bitcoin Investment Trust you used the same amount of cash to buy bitcoin on a cryptocurrency exchange like GDAX, you'd get 42% more bitcoin for your money on the median day, and your investment would follow bitcoin's price perfectly. Yet for some reason, people continue to pile in to Bitcoin Investment Trust, even when they're paying twice the going rate of bitcoin to do it.
Bitcoin is already an uncertain gamble, but Bitcoin Investment Trust adds yet another gamble on top of it. Even if you knew with certainty that bitcoin would be worth more tomorrow than it is worth today, you'd lose money a third of the time if you placed your bet by purchasing shares of Bitcoin Investment Trust.