GBTC is the WORST Way to Buy Bitcoin (Unless...) - YouTube

Bitcoin has been one of the best performing  assets in recent years, and as its popularity  

and price continue to grow, more investors  are looking for how to get involved.

For US investors, the most popular way  to do this within traditional markets,  

judging by assets under management, is with the  Grayscale Bitcoin Trust, ticker GBTC. However, I’m  

here to tell you why this is potentially the worst  way to buy and own Bitcoin. Now I’ll give credit  

where credit is due, because the convenience of  the Bitcoin trust is definitely worth noting.

Unfortunately, I believe the drawbacks of  GBTC far outweigh the convenience it offers.  

Specifically, we’re going to talk about  management fees and the structure of the fund.  

The combination of these two problems means that  GBTC investors are historically paying more to  

own Bitcoin while also getting lower returns, at  least compared to buying it directly themselves.

Because of this, there’s only one specific  scenario where I think GBTC makes any sense  

whatsoever, and that would be within  a retirement account. But even then,  

I’ll show you why the numbers don’t quite add up.

To wrap things up, I’ll offer a few better options  for investing in Bitcoin, including some within  

traditional markets. Let’s take a look. The Grayscale Bitcoin Trust (GBTC) 

First we need to understand the structure of the  Grayscale Bitcoin Trust and the convenience that  

it offers. To put it simply, GBTC gathers money  from investors, uses it to purchase Bitcoin,  

and issues shares to investors that represent  a portion of the fund’s Bitcoin holdings.  

According to their latest SEC filings, the  Grayscale Bitcoin Trust held a total of 654,600  

Bitcoin, with a total of 692,370,100 shares.  

This means that each share of GBTC  represents approximately .0009 Bitcoin.

However, a very important characteristic to  understand about GBTC is that it operates as a  

closed-end fund, which differs substantially  from typical ETFs and investment funds.

Many investment funds are open to new investors  at all times, and as cash flows into the fund,  

they’ll continue to purchase more of the  underlying holdings and create new shares.  

But as a closed end fund, GBTC has a  limited number of shares in circulation  

and is not always open to new investors.

Occasionally, GBTC will open up what they call  “private placement” which allows accredited  

investors to buy into the fund, at which point  they’ll purchase more bitcoin and issue new  

shares to those investors. However, to be an  accredited investor, you must make significant  

income and have a net worth of at least $1  million. This means that the average investor  

cannot buy into the fund through Grayscale,  but instead must buy shares on the secondary  

markets via eligible brokerage accounts from the  number of outstanding shares that are available.

Furthermore, Grayscale currently doesn’t allow  investors to redeem their shares for cash.  

This is something that many big investment fund  providers offer, which allows investors to cash  

out of their investments at net asset value. With  GBTC, however, the only way that investors can  

currently realize their returns is to sell their  shares to someone else on the public market.

So with these characteristics, Grayscale has full  control over the amount of money flowing in and  

out of the fund, as well as the amount of Bitcoin  they own at a given time. And because the number  

of available shares is often a fixed supply,  new investors have to go to the public market to  

invest in the fund, where prices will be heavily  influenced by demand. Theoretically, more demand  

for GBTC will drive up the price of the shares,  while a drop in demand will decrease the price.  

So while each share will represent the same  amount of Bitcoin, you may be paying more or  

less for that Bitcoin depending on the price  action on a given trading day. In other words,  

GBTC is not able to perfectly  track the price of Bitcoin,  

which is one of the biggest negatives of the fund  and something we’ll dig into further in a minute. 

GBTC Benefits Even though it’s not a perfect solution, GBTC  

does serve its purpose as a vehicle for gaining  direct Bitcoin exposure in traditional markets.

For starters, this makes it really convenient  for investors to add Bitcoin to their current  

portfolios. You don’t need to create new accounts  anywhere because it’s available through most  

brokerages. This means that investors don’t  need to figure out how to use digital wallets,  

private keys, sending transactions and all  of the technology surrounding Bitcoin that  

may be intimidating to those unfamiliar with  cryptocurrency. Most people in the crypto  

space will argue “not your keys, not your  Bitcoin”, which certainly has its merits.  

However, I’m of the opinion that as Bitcoin gets  added to more traditional investment vehicles,  

they’ll have to have pretty strong security  in place. So from a security perspective,  

I tend to be pretty trusting of the  systems involved, especially in this case,  

where the custodian of GBTC’s bitcoin portfolio  is Coinbase. I think the “not your keys” argument  

is more applicable to people who hold and view  Bitcoin as a decentralized currency, and is less  

important for those who simply want to use Bitcoin  as a digital gold or alternative investment.

Additionally, GBTC simplifies taxes because it  keeps everything under one umbrella, so to speak.  

Instead of juggling capital gains  and taxes between brokerage accounts  

and cryptocurrency exchanges, GBTC  keeps your Bitcoin activity nested  

within your usual accounts where tax  documentation is readily available.

Finally, GBTC is one of the only ways  to hold Bitcoin in a retirement account,  

which we’ll further explore later in this video. Why GBTC is the Worst Way to Buy BTC 

So with these benefits, why is GBTC an awful  way to buy Bitcoin? It really comes down to two  

issues, which are the management fees associated  with holding GBTC and the fact that investors are  

almost always paying a premium to own Bitcoin when  using this fund. We’ll take a closer look at both  

of these problems. Fees 

We’ll start with the management fees, which  come in at 2% annually. This is a cut that  

Grayscale takes for operating and managing the  Bitcoin trust. According to their SEC filings,  

the interest accrues daily and is paid out  on a monthly basis for the previous month.

So how this works is every day at market close,  Grayscale will use the market price of Bitcoin  

to determine the fund’s net asset value, or NAV,  which is the dollar value of their entire Bitcoin  

portfolio. Because fees accrue daily, they’ll  determine the daily rate of a 2% annualized fee,  

which is approximately .0055% of the NAV.  They’ll let this accrue throughout the month,  

and when the month is up, they’ll sell Bitcoin  from the trust to pay themselves that fee.  

So every month, they are selling some of your  Bitcoin to collect that 2% annualized fee.  

Over time, this means that each share  represents less and less Bitcoin.

Although management fees are common in  investment funds, 2% is extremely steep.  

And while it may not sound like much, it could  cost you tons and tons of money over the long-run,  

especially with an asset like Bitcoin that may  be appreciating quite a bit in the coming years.  

Let’s take a look at an example using  the fund’s previous performance.

On March 31st, 2018, 1 share of GBTC represented  about .001 Bitcoin. On that date, Bitcoin closed  

at approximately $6,900, which means your share of  GBTC represented about $6.93 of Bitcoin. Over the  

next few years, Grayscale continued taking 2% of  the fund’s Bitcoin annually for management fees.  

As a result, 3 years later on March 31,  2021, 1 share of Bitcoin represented about  

.000945 Bitcoin, approximately  6% less Bitcoin than in 2018.  

And the real cost of these fees become apparent  when you look at how fast Bitcoin is appreciating.

Not only are you losing a portion  of your investment every year,  

but because Bitcoin is such  a rapidly appreciating asset,  

you’re also losing potential gains from whatever  price Bitcoin could reach in the future.

Because of the convenience that GBTC offers,  this may be a reasonable compromise to some,  

but I think 2% is way too high to justify holding  

this fund. Premium 

And that brings us to the next big  problem with the Grayscale bitcoin trust,  

which is the exorbitant premium that investors  are paying to get their hands on Bitcoin this way.

As we covered earlier, due to the structure of  the fund, unless you’re an accredited investor,  

the only way to buy into GBTC is on the  secondary market. And again, in this scenario,  

the fixed supply of shares means that the share  price will fluctuate based on demand. So even  

though one share currently represents  .00095 Bitcoin, you might actually pay  

more or less than the exact dollar value  of Bitcoin at the time of your purchase.

This premium is measured by the  difference in share price and  

NAV, which again is net asset value. NAV will  represent the dollar value in Bitcoin that you  

get per share, while the share price is  simply what the shares are trading for.

Here’s a quick example from January 31, 2020.  On this day, shares were trading at $10.82.  

However, each share represented just $9.05  in Bitcoin value. This is because the amount  

of Bitcoin per share remains constant, but demand  for GBTC pushed share prices higher. As a result,  

investors who purchased on this day paid a premium  of nearly 20% to purchase Bitcoin through GBTC.

The reason this is a big problem is that  the fund nearly ALWAYS trades at a premium.  

According to Ycharts, the average  premium of GBTC is more than 30%,  

although there’s many time frames where  it’s traded at even higher premiums.  

So historically, GBTC is an incredibly expensive  way to buy Bitcoin, because you’re paying more to  

own it with GBTC than what it actually costs  to buy it outside of traditional markets.  

If this premium ever diminishes or even goes  negative like it has lately, the value of your  

investment could drop substantially even if  Bitcoin’s price manages to stay the same.

Just like expense fees, this may be a  reasonable compromise for some investors,  

but combining both 2% annual fees  and an average premium of over 30%,  

I believe the costs of buying into GBTC are going  to outweigh any potential benefits or convenience  

of holding it in a standard brokerage account. GBTC + Retirement Accounts 

Of course, like I said, the one exception MIGHT be  if you are using GBTC as a way of holding Bitcoin  

in a retirement account. The benefit here is  that in a tax-sheltered retirement account,  

you will not have to pay any taxes on the capital  gains from GBTC, which ideally will be quite high.

However, I want to challenge investors to consider  

the following problems with holding  GBTC within a retirement account.

First, this doesn't protect against management  fees. You’ll still lose 2% of your Bitcoin  

every year, which can compound to be very  expensive over 10, 20, 30 years or more. 

Second, it still doesn’t solve the issue  of paying a premium for Bitcoin almost  

every time you purchase shares. This could be  really dangerous if the premium diminishes,  

which is likely to occur as more Bitcoin funds  become available and there’s less demand for GBTC. 

Last, and most importantly, I don’t think the  tax benefits are sure to make up for these costs.  

Consider the fact that Bitcoin doesn’t  pay dividends, so you don’t even need  

to worry about any sort of taxes until it  comes time to sell. From this perspective,  

retirement accounts only provide you the  tax protection when you sell Bitcoin,  

which may be important to traders, but not  as much for long term buy and hold investors.

And when you do want to sell, there’s two outcomes  depending on your retirement account. If it’s a  

pre-tax account like a standard IRA or 401k, you  can sell your Bitcoin tax-free, but you’ll still  

owe income tax on any money you withdraw in  retirement. In this case, you’ll owe a minimum  

tax rate of 10%, which will increase depending  on how much you’re withdrawing. This is still  

a preferable tax treatment if your income stays  under $40,000/year, but anything above puts you  

in the 22% tax bracket. In these cases, you might  as well have bought and held Bitcoin directly in a  

digital wallet, where you could later sell with  the favorable capital gains tax rate, which is  

likely going to cap out at 15% for most investors,  assuming you make less than $400,000 a year. Plus,  

then your Bitcoin was able to grow without 2%  fees and you didn’t have to pay a premium for it.

The other outcome is a post-tax account like a  Roth IRA. In this case, you can withdraw your  

Bitcoin returns tax free thanks to GBTC, and  this is the rare scenario where I think you  

can gain some benefits from holding GBTC.  The question is, do these benefits outweigh  

the 2% annual fees and consistent premium  you’ll be paying to hold it over the years?  

It’s impossible to answer this question with  any guarantees, because it will ultimately  

depend on how Bitcoin performs in the coming  years. But personally, I think the numbers are  

against you with the costs of GBTC. So here’s  what I’m doing instead to secure long-term,  

tax-efficient growth from Bitcoin. What to Buy Instead of GBTC 

First, like I said, it just makes more sense in  many cases to buy Bitcoin directly. It’s easier,  

safer and cheaper than ever, and you can even earn  interest on it to increase your returns further.

For example, you can purchase Bitcoin  on Coinbase pro with a one-time .5% fee.  

After purchasing, you can hold your Bitcoin  at no cost to you, or you can even move it  

to something like BlockFi where you can earn  up to an extra 5% interest on that Bitcoin.  

Both Coinbase and Blockfi then provide tax  documents that you can easily add to your tax  

return to accurately report any taxes. You’re not  paying any sort of premium to purchase Bitcoin,  

it’s not costing you anything to hold it and  it’s just a slight inconvenience at tax season,  

if and when you choose to sell. I’ll happily take  a gentle 15% tax rate after decades of holding  

Bitcoin, rather than paying 2% of my Bitcoin every  single year in fees and battling against premiums.

Think about it this way: if you did a lump sum  investment into GBTC with 2% annual fees, after  

8 years of paying those fees, your shares would  represent 15% less Bitcoin than you started with.  

Instead, you can buy Bitcoin outside of  traditional markets, hold it for at least  

8 years and use all of the money you saved in  fees to pay your long-term capital gains tax.  

If you held GBTC in your retirement  account for longer than 8 years,  

it’s going to cost you more in fees  than it would to buy and hold Bitcoin  

outside of traditional markets and  simply pay taxes on your returns.

However, I still see the value in the convenience  of a retirement-friendly Bitcoin investment.  

And to be completely honest, I still  want to hold one of these investments  

in my retirement account - but GBTC isn’t  it. Fortunately, I think it’s the first  

of many to hit the markets, and as more  of these funds are created, competition  

should lower management fees and they’ll be  able to track Bitcoin’s price more closely.

The first example of this is the Osprey Bitcoin  Trust, which functions exactly the same as GBTC,  

but only has a .49% management fee. That’s already  way more attractive than Grayscale’s fees, and  

that’s a cost I’m much more comfortable incurring  to hold Bitcoin in a retirement account. They’re  

still vulnerable to premium pricing, but that  too should decrease as more products come out.

Alternatively, a Bitcoin ETF using an open-end  fund structure would solve the issue of premiums  

and may also offer lower fees. These have been  highly anticipated for years, with multiple  

applications in the works. It may still take  some time for these to come to market, but I  

think the more Bitcoin proves its here to stay,  the more of these products will start going live.

So for now, I like the Osprey Bitcoin  Trust for retirement accounts,  

but I’ll probably wait things out a little longer  and keep buying Bitcoin directly in the meantime.

Let me know how you are buying  Bitcoin in the comments,  

especially if you are using an investment  product that I didn’t mention in this video.  

Thanks for watching, and I’ll see you next week.