Cathie Wood bought Grayscale Bitcoin Trust. Should you?

The Grayscale Bitcoin Trust (GBTC -1.77%) has become a recurring theme in the headlines in recent weeks. Trust recently reached a new record low discount compared to the price of Bitcoin (BTC -0.99%) as a result of contagion stemming from one of the largest crypto exchanges, FTX, declaring bankruptcy.

With GBTC trading at a discount, investors can see it as an opportunity. Well-known investor Cathie Wood did. Her firm, Ark Invest, recently bought another $1.4 million to bring the total number of shares up to a whopping 6.357 million shares. But before you decide whether to follow Wood’s investment strategy, it may be helpful to understand exactly how the Trust works and how it differs from owning Bitcoin itself.

Grayscale Bitcoin Trust was created in 2013 and is designed for investors who want exposure to Bitcoin without actually owning the asset. Investors buy shares of the Trust on the stock market, and Grayscale holds the actual Bitcoin. It’s important to know that the Grayscale Bitcoin Trust owns Bitcoin, but to truly understand why the Trust trades at a discount, you need to understand the dichotomy between a trust and an exchange-traded fund (ETF).

Grayscale Bitcoin Trust is currently valued at around $10.3 billion and owns 643,572 Bitcoins. Since it is a trust (and not an ETF), Grayscale cannot actively manage the value of its Bitcoin relative to the number of shares bought or sold by investors. When investors buy or sell their shares in the Trust, Grayscale does not immediately turn around and buy or sell Bitcoin. For the most part, Grayscale hopes that the free market values ​​shares in the Trust relatively close to the value of the Bitcoin it owns. However, it has failed recently.

Since the beginning of the year, Grayscale Bitcoin Trust has been trading at a discount as more investors have redeemed their shares, and Grayscale has still held about the same number of Bitcoins. However, for most of its history, GBTC traded at a premium, meaning its value per share was worth more than the value of Bitcoin held by Grayscale due to increased investor desire to gain exposure to Bitcoin. If the Trust were an ETF, the price would more closely follow the value of Bitcoin, thereby closing these gaps and bringing a balance between the price of the shares and the value of Bitcoin on a more consistent basis.

Should you follow Wood’s lead?

Currently, the market price per share of the Trust is just under $9. If it were a true balance, the price per share should be around $15.

You might think that this presents a lucrative opportunity. If this gap is closed, investors will be able to earn almost 40% profit per share in addition to the possibility that the value of Bitcoin may increase in the future as well.

This is probably part of Wood’s reason for buying more shares in the Trust recently. She and her team may see the discount as just another reason to buy and potentially increase profits, but no one knows.

Their rationale may also relate to the possibility that the trust may be converted to an ETF in the future. So far, Grayscale’s efforts to convert to an ETF have been crushed by the Security and Commission Exchange (SEC). Optimists believe that it is likely only a matter of time before Grayscale receives this approval as investor demand for exposure to Bitcoin increases. Should the SEC give Grayscale the green light to become an ETF, this price gap should later be closed.

If you are looking for exposure to Bitcoin, the best way to do it would be to buy Bitcoin yourself. By doing so, you have full control over your Bitcoin and can do with it as you wish. However, if you want to take a little extra risk for the possibility of an extra 40% upside, GBTC may be worth considering.