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Why Grayscale Bitcoin Trust Surged Today

By Joe Tenebruso – Updated May 13, 2019 at 8:32PM

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Bitcoin's price is soaring -- and it's taking this fund's shares along with it.

What happened

Shares of Grayscale Bitcoin Trust (GBTC -0.91%) popped 18.7% on Monday, as the price of bitcoin (BTC-USD) rose to multi-month highs.

So what

Bitcoin's price climbed to more than $8,000 on popular exchange Coinbase on Monday, continuing a sharp upward trend that's seen the cryptocurrency's price more than double in recent months.

Institutional demand for cryptocurrencies appears to be growing. Fidelity Investments recently published a survey showing that 22% of institutional investors -- such as pension funds, university endowments, and hedge funds -- are already invested in digital assets, while 40% say they are open to investing in this nascent asset class in the next five years.

Grayscale Investments, the digital asset management firm that oversees Bitcoin Trust, is also seeing rising institutional demand for its products. In its first-quarter report, Grayscale said investor inflows into its cryptocurrency-focused investment funds increased 42% to $42.7 million, with 73% of this capital contributed by institutional investors.

Buying by these professional investors is likely helping to drive up the price of bitcoin -- and with it, the price of Grayscale Bitcoin Trust.

A miniature bull on top of a keyboard with the word Bitcoin in place of the word Return.

Bitcoin bulls are driving the cryptocurrency's price sharply higher. Image source: Getty Images.

Now what

Grayscale Bitcoin Trust is designed to act as a proxy for the price of bitcoin. Each share of the trust is backed by roughly 0.001 bitcoin. So in theory, its share price, when multiplied by 1,000, should roughly equal the price of one bitcoin.

But at its current price of $10.21, Grayscale Bitcoin Trust implies a bitcoin price of more than $10,000 per coin. Said differently, Grayscale Bitcoin Trust is trading for a premium of nearly 30% to the value of its bitcoin assets. 

As such, investors seeking exposure to bitcoin are likely best served by buying the cryptocurrency itself, rather than Grayscale Bitcoin Trust.

Joe Tenebruso has no position in any of the cryptocurrencies or stocks mentioned. The Motley Fool has no position in any of the cryptocurrencies or stocks mentioned. The Motley Fool has a disclosure policy.

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