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The Surprise Bet to Beat the Coronavirus Bear Market

By Dan Caplinger - Apr 17, 2020 at 8:30AM

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Investors are putting their hopes in one particular investment, and by one measure, it's as attractive as it's been in a long time.

The coronavirus pandemic has been a human tragedy, and it's also had major impacts on the financial markets. Even though stocks have recovered somewhat from the worst depths of the coronavirus bear market, they're still substantially below their highs from just a couple of months ago. Many investors expect times to get worse rather than better in the months to come, and few believe that a quick turnaround is likely.

Given the market volatility, many investors are looking for ways to diversify their portfolios while still positioning themselves for a rebound if conditions improve. Many are paying closer attention to traditional safe havens like gold, whose price has climbed to levels not seen since the early 2010s.

Another investment that many mainstream investors have largely forgotten about has also regained some of its popularity. That investment is cryptocurrency, and one asset manager that focuses on crypto tokens reported record interest in its most popular investment opportunity within the space.

Wall Street sign in front of New York Stock Exchange.

Image source: Getty Images.

Grayscale shows investors the money

Grayscale Investments has been a pioneer in digital currency asset management, and its Grayscale Bitcoin Trust (GBTC 1.57%) has become one of the most direct ways to invest in the leading cryptocurrency. The trust owns about 307,000 bitcoin tokens at last count, and every 1,000 shares of the trust corresponds to an effective ownership interest of just under 1 bitcoin.

Grayscale reported earlier this week that it has seen more than $500 million pour into its family of cryptocurrency-related investment products, with almost $390 million of that moving into Grayscale Bitcoin Trust. Similar investments tied to the value of ethereum and a basket of other crypto tokens have also seen dramatic inflows.

The company said that institutional investors were primarily responsible for most of the inflows, with hedge funds, in particular, playing a key role. Not all of those funds had a cryptocurrency focus, with many simply looking to pursue more common themes like global macroeconomics and multistrategy asset allocation.

The quarter's inflows marked new records for Grayscale, but they weren't the first the company has seen. Over the past 12 months, more than $1 billion has gone into Grayscale products, bringing its total assets under management to about $2.2 billion.

Why Grayscale Bitcoin Trust is a better deal than usual

The Grayscale Bitcoin Trust hasn't been an ideal investment for bitcoin fans because of the premium that investors have put on its shares. Throughout 2019 and early 2020, before the coronavirus bear market hit, investors would've typically had to pay anywhere from 20% to 40% more for trust shares than the underlying value of the bitcoin they represented. During the heyday of the bitcoin boom, premiums as high as 120% prevailed.

Now, though, the premium is near its lowest levels in years. As of April 15, shares of the trust cost just 9% more than the underlying value of the bitcoin tokens they represented. Only during market downturns in early 2017 and late 2018 have trust shares seen smaller premiums, and actual discounts have been exceedingly rare.

Is now the time for Grayscale Bitcoin Trust?

To be clear, Grayscale Bitcoin Trust still has some not-so-ideal attributes. It has a relatively high annual expense ratio of 2%, which means that each share will gradually erode to represent a smaller portion of a bitcoin token. The current value of 0.00096376 bitcoin per share is down from 0.00098576 just over a year ago, reflecting the need to liquidate cryptocurrency in order to cover Grayscale's fees.

Nevertheless, some investors find that fee well worth the cost. The shares trade in brokerage accounts just like any stock or ETF, making it unnecessary to jump through the hoops of getting a digital wallet and a reputable cryptocurrency exchange from which to buy bitcoin directly.

For those who believe that bitcoin could gain ground in the current tough investment environment, it's been rare to find a better time than now to consider Grayscale Bitcoin Trust. Considering that Grayscale has a relatively small premium and the lack of other exchange-traded vehicles for owning cryptocurrency, interest in the ETF is soaring -- and could climb even further if bitcoin can return to its record levels of just a couple of years ago.

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