It's never been easier to buy Bitcoin (BTC -0.37%), but your options are limited at most traditional brokerages. Your options grow even more limited if you want cryptocurrency exposure in an IRA account. There are now two publicly traded trusts that offer investors a way into their stash of Bitcoin tokens, but Grayscale Bitcoin Trust (GBTC -0.42%) and Osprey Bitcoin Trust (OBTC -2.45%) are polar opposites in just about every sense.
One packs an annual management fee that is four times greater than the other, but the other trades at a ludicrous premium to its net assets. Which one is right for you? Let's take a closer look, including -- of course -- the option of just buying Bitcoin tokens directly.
Bit by Bitcoin
Grayscale Bitcoin Trust has been around since 2013. It went public in 2015. It's huge, with $30.7 billion in assets under management. The biggest knock on Grayscale Bitcoin Trust is that it charges 2% a year in management fees, and like mutual funds it is taken out gradually over the course of the year. It's a stiff cover charge, but we'll get to that issue shortly.
Osprey Bitcoin Trust is the shiny new toy for Bitcoin bulls and bears looking for a stock exchange-listed vehicle. It hit the market earlier this month. It has just $77 million in assets under management, so it's tiny. The biggest selling point on Osprey Bitcoin Trust is that it charges just 0.49% in annual fees. With all things being equal it would be easy to choose the newish Osprey trust over Grayscale's groundbreaking platform, but that's not the case. It's not even close.
When Grayscale Bitcoin Trust hit the stock market it was a feeding frenzy. By the end of May in 2015 it was trading at a 137% premium to its actual Bitcoin stake. We're not talking about a 37% mark-up on a baseline of 100% for Bitcoin. We're saying that investors were willing to pay more than double what it was actually worth. It was harder to buy cryptocurrency four years ago, and there were plenty of horror stories about wallet security. The climate is kinder now, and so is the premium on Grayscale Bitcoin Trust.
Grayscale's mark-up has fluctuated between 6% and 38% since 2019 -- until last week. Grayscale Bitcoin Trust began last week fetching an 8% premium to the Bitcoin it tracks. During the week's wild trading there were moments when it traded at a slight discount. By the time the closing bell sounded on Friday, Grayscale's trust was at a rare 1.4% discount to its corresponding Bitcoin assets.
Osprey's flying too high right now
Osprey Bitcoin Trust is still in the honeymoon phase with investors, and that's dangerous. If Grayscale seemed outrageous at a 137% premium when there were no other stock exchange-listed alternatives why is Osprey commanding a 152% premium? It closed out the week at nearly $40 with a net asset value of $15.87. The trust actually moved higher last week despite Bitcoin itself taking a big hit.
With just $77 million assets under management the trading will be volatile. Scarcity will make this a bucking bronco. However, given the choice between Grayscale and Osprey right now is there even truly a choice? Yes, there's a 151 basis point difference in the management fees between the two but it would take roughly a century of ownership to justify paying a 152% premium for Osprey with Grayscale at a slight discount.
$GBTC vs. $OBTC— Rick Munarriz (@Market) February 27, 2021
NAV: $43.81 (1.4% discount)
Annual Fee: 2%
AUM: $30.7 billion
NAV: $15.87 (152% premium)
Annual Fee: 0.49%
AUM: $77 million
If you're looking at the lower fee and NOT the premium you're doing it wrong. #Bitcoin
You can also own Bitcoin directly, and a growing number of fintech platforms are making it easier than ever. If you plan on holding Bitcoin for at least a couple of years it would make sense to just buy in directly. However, if you're not sure how long you want to be in crypto -- and you have an itchy trigger finger -- keep in mind that all of the best-known trading platforms including Coinbase, PayPal, and Cash app charge a minimum of 1.5% to 2% on purchases and also the sales. If you think you'll be in and out within 18 months that's the kind of speculation that can cost you more in fees than it would buying Grayscale at a broker that offers zero commission trading and seeing 2% a year erode gradually.
Buying Bitcoin directly is the best approach for long-term investors that have done their research, accepting the risks that come with buying into crypto. However, if your choice is down to Grayscale or Osprey as the two available stock exchange-listed trusts Grayscale Bitcoin Trust is the obvious call.
Correction: The original version of this report misstated the year the Grayscale Bitcoin Trust went public. We're sorry for the error.