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I Own Grayscale Bitcoin Trust, but It May Not Be Right for You

By Rick Munarriz - Feb 16, 2021 at 9:25AM

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The quickest way to get some skin in the crypto game may not be the smartest way.

I picked an interesting time to add some cryptocurrency exposure to my portfolio. I initiated a position in Grayscale Bitcoin Trust (GBTC -4.82%) -- the first publicly traded security investing solely in Bitcoin (BTC -2.63%) -- four months ago. The shares have more than tripled in my short tenure of ownership. 

There are a few valid knocks on Grayscale Bitcoin Trust. It trades at a premium to the Bitcoin tokens it owns. It also charges a stiff 2% annual fee.

However, there are some arguments in favor of Grayscale Bitcoin Trust. It works for me -- along with a smaller position in Bitcoin itself -- but let's see if it might not work for you.

Woman in pink plaid shirt holding a hammer behind her back and closing in on a piggy bank to break it.

Image source: Getty Images.

A matter of trust

Like most growth investors, I had a pretty good year in the market last year. I wanted to rebalance my asset exposure, and Bitcoin seemed like a smart place to allocate a small part of my overall portfolio. I do the lion's share of my investing in an IRA, and buying Grayscale Bitcoin Trust was a seamless commission-free transaction of a publicly trading security. There are a handful of small brokerage platforms that offer the actual ownership of Bitcoin within an IRA, but that wasn't an option with my mainstream broker.

Grayscale Bitcoin Trust has historically traded at a 20% to 30% premium to its underlying Bitcoin assets. Scarcity will prop up the value of an investment, but the markup has narrowed lately. It's never been easier to make an outright crypto purchase, and rival investment vehicles that will challenge Grayscale Bitcoin Trust are in the works. 

Let's turn to Friday's market close. Grayscale Bitcoin Trust closed at $48.91, but what does that mean? Well, Bitcoin itself was at $47,683.65 when the stock exchange closed for the week, and each share of Grayscale Bitcoin Trust currently accounts for 0.00094789 of a Bitcoin token. Multiply those two numbers and you arrive at $45.20. The trust at $48.91 was fetching just an 8% premium to that price when the market closed. 

Then we get to the annual fee. Grayscale Bitcoin Trust is passively invested in the leading cryptocurrency but still needs to make money. This is where the 2% annual fee comes in. Like a mutual fund, the fee is charged in small installments throughout the year. A fund can sell assets or keep cash on hand to pay itself, and for Grayscale Bitcoin Trust, this means the gradual but perpetual reduction of the Bitcoin-per-share ratio. The Trust updates the figure every trading day.

An 8% premium and a 2% annual fee may not sound very compelling, but it's not as if buying and selling Bitcoin itself is free. Leading crypto marketplace Coinbase charges as little as 1.49% on a purchase transaction in addition to a cryptocurrency-conversion spread of roughly 0.5%. In short, just buying into Bitcoin itself through Coinbase or PayPal will eat up the equivalent of Grayscale Bitcoin Trust's annual fee. 

If you plan on buying Bitcoin to hold for a long time, it certainly makes sense to just buy the crypto directly. However, if you plan to trade quite a bit, those transaction fees will add up in a hurry if you have an itchy trigger finger.

Grayscale Bitcoin Trust isn't perfect, but it's available through most leading brokerages without commissions. In short, the Trust makes sense if you're investing in an IRA or plan to actively trade in and out of your position. Everybody else will probably be best served by just purchasing Bitcoin tokens. 

With tech company CEOs including Michael Saylor and more recently Elon Musk making 10-figure investments in Bitcoin, it's fair to say that cryptocurrency has gone mainstream. Deciding if cryptocurrency is a good investment is always the first step in the Bitcoin decision process, but deciding how to go get some skin in the game is an equally important next step.

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Stocks Mentioned

Grayscale Bitcoin Trust (BTC) Stock Quote
Grayscale Bitcoin Trust (BTC)
$18.75 (-4.82%) $0.95
Bitcoin Stock Quote
$29,992.58 (-2.63%) $-810.45

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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