The Bitcoin Investment Trust (OTC:GBTC), which essentially functions as an ETF that allows people to bet on the price of bitcoin, recently announced that its shares would undergo a 91-for-1 stock split. This will make the price of the fund much lower, and make it accessible to many more investors. Here are the details of the split, what it means for you as an investor, and what you need to know about the Bitcoin Investment Trust.
What is the Bitcoin Investment Trust?
Essentially, the Bitcoin Investment Trust works like an exchange-traded fund. The fund owns bitcoins on behalf of its investors, which the fund's managers are responsible for keeping safe. Based on the current amount of bitcoins the fund owns, each share currently represents about 0.092 bitcoin.
Details of the split
The Bitcoin Investment Trust recently declared that its shares will split 91-for-1, meaning that for every share that investors own, they'll receive 90 additional shares after the split is complete.
As a result, the stock price will immediately drop by a factor of 91. Based on the $1,970 stock price as of this writing (Jan. 15), this implies that each share of the trust will immediately fall to a price of about $21.65. Obviously, as the stock price moves up or down prior to the completion of the split, the post-split value will change accordingly. In fact, the stock jumped by 12% on the day the news broke, although bitcoin didn't move by nearly as much.
It's also worth noting that the amount of bitcoin represented by each share of the fund will also decrease by the same factor. After the split, each share will represent about 0.00101 bitcoins.
Shareholders of record as of Jan. 22's market close will be entitled to the split, and the split will be completed on Jan. 26.
The stock's ticker symbol will remain the same, though, and there is nothing that shareholders need to do to get their additional shares.
Why is the split happening, and what does it mean for shares?
The main reason for the split, and for most other splits for that matter, is to make shares more accessible to everyday investors who want to purchase them. At the current price, someone who wanted to invest $100, $500, or even $1,000 in bitcoin couldn't even afford to buy one share of the Bitcoin Investment Trust. Now, they'll be able to invest if they want.
To be clear, the split won't affect the stock's valuation, at least not directly, other than dividing the price into 91 pieces. In other words, if you own one share that's worth $1,970 before the split, your investment will still be worth $1,970 immediately after the split. There's no effect to the overall intrinsic value of the business.
That said, a stock split like this can affect the share price in other, more indirect ways. Specifically, since more retail investors will be able to afford shares, it could cause volume to spike, and could even put upward pressure on the stock.
Could bitcoin trade at an even higher premium?
My biggest problem with the Bitcoin Investment Trust is the big premium its shares trade for, relative to the bitcoin owned by the fund.
To be fair, the shares deserve some premium for the convenience they provide. After all, it's significantly easier to buy a share of an ETF than it is to buy and store your own bitcoin. However, the premium commanded by the fund is way too high for any rational investor to accept.
Here's what I mean. I already mentioned that the Bitcoin Investment Trust owns about 0.092 bitcoins per share, and based on the current bitcoin price of about $14,000, this means that each share represents bitcoin worth $1,288.
But the shares trade for $1,970, a massive 53% premium to the value of the underlying bitcoins. If the pending stock split does boost volume and cause the share price to get even higher, it could result in an even higher premium.
You're better off just buying bitcoin
In addition, it's worth mentioning that the Bitcoin Investment Trust also comes with a 2% management fee, meaning that each year, management gets $20 out of every $1,000 in investment value.
And just like I said with the premium, management certainly deserves some fee. After all, they are tasked with buying the actual bitcoins and taking appropriate measures to keep it safe. However, a 2% fee is excessive. Commodity ETFs can be found with annual fees of as little as 0.25%.
So, if you're thinking about buying shares of Bitcoin Investment Trust after it splits, it's important to know what you're getting into. While I'm not a fan of bitcoin as anything more than a vehicle for speculation (not as an investment with money you can't afford to lose), if you do want to bet on the price of bitcoin, you're better off putting in a little extra effort and simply buying the digital currency itself.