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Bitcoin Institutional Investors Facing High Premiums

Some of the earliest Bitcoin investors seeking regulated exposure to the Bitcoin market have been forced to pay high premiums compared to Bitcoin spot price. At the peak of Bitcoin’s rally, some paid as much as twice Bitcoin’s market value.

Launched in September 2013, the Grayscale Bitcoin Investment Trust (GBTC) was the first security solely invested into Bitcoin and is available on the over the counter (OTC) market in the United States. Investors pay a high premium, with the price of GBTC being USD 5.03 per share as of 23 November 2018. Each share is BTC 0.00099226 Bitcoins, corresponding to a price per Bitcoin of USD 5,070. This is a 19% premium versus the current Bitcoin spot price of USD 4,260.

During the rally in December 2017 when Bitcoin’s spot price briefly hit USD 20,000, GBTC simultaneously reached USD 40,000, a 100% premium. This likely represents one of the highest Bitcoin prices in history, perhaps only comparable to black market prices in countries where Bitcoin is banned.

GBTC is one of the few mechanisms for institutional investors to gain exposure to the Bitcoin market, giving GBTC scarcity value. Institutional investors require completely regulated and safe solutions like GBTC and cannot simply buy Bitcoins on the spot market, for liability reasons. Further, GBTC is available on stock trading platforms via OTCQX, making it one of the only Bitcoin securities actually listed. Currently, BTC 202,500 worth of GBTC have been issued, worth over USD 1 billion.

Institutional investors that buy GBTC can handle it like a traditional investment vehicle, where they just buy and sell their shares. Clients do not have to buy or store their Bitcoin. Grayscale claims that that the Bitcoins backing GBTC are safe, storing them with the cryptocurrency custodian Xapo in cold storage vaults. The Bitcoin stored in these vaults are protected by multi-sig, physical security, and process security.

Additionally, unlike regular Bitcoins which are pseudo-anonymous, shares of GBTC are titled in the investor’s name, making them auditable, transferable, and easier to work with for financial and tax advisors. This makes it ideal for IRA, brokerage, and investor accounts.

Further, GBTC is audited yearly by Friedman LLP, and GBTC has Davis Polk & Wardwell LLP as an official legal counsel. Essentially, GBTC is completely above board and safe for institutional investors, and that is why many investors have chosen to pay a premium for GBTC rather than using the spot market.

 

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