GBTC is to Bitcoin what the dollar was to gold

Summary of the assignment

Grayscale Bitcoin Trust (OTC:GBTC) has been under scrutiny following the demise of FTX (FTT-USD) and has actually been sued by a hedge fund that claims GBTC is not acting in its best interest. investors.

Ultimately, I don’t see GBTC in danger of going out of business, but it is important for readers to know that GBTC is an inferior product to Bitcoin (BTC-USD).

GBTC: A quick overview

Grayscale Bitcoin Trust has been making headlines in recent weeks, as the demise of FTX has put the spotlight on all manner of crypto companies and investment vehicles.

But before we get into what’s happening now, let’s quickly dive into how GBTC came about and works.

GBTC was established in 2013 as an investment vehicle for accredited private investors. Sometime later, it received FINRA approval, making the shares eligible for public trading. GBTC is part of the large conglomerate Digital Currency Group.

GBTC purchases Bitcoin using investors’ funds and then stores them in “cold storage” through Coinbase, Inc. (COIN). Each share represents a given amount of Bitcoin, but this does not mean that shares can be redeemed for Bitcoin.

This is partly why Grayscale currently trades at a discount to Bitcoin and why the fund has worked so hard to gain approval to become an ETF.

GBTC is currently trading at a 43% discount to Bitcoin due to uncertainty surrounding its inventory, security and the fact that investors have been selling. More importantly, though, the fact that GBTC is not an ETF means that it cannot arbitrage this discount in the open market.

This steep discount represents a possible opportunity for those looking to gain exposure to Bitcoin, but investors must understand that GBTC is not Bitcoin.

GBTC is facing trust issues

GBTC can be a way to gain exposure to the movements in the Bitcoin price, but it is a far cry from owning Bitcoin. The Fund does not offer redemption in Bitcoin or fiat, and its interests are not necessarily aligned with the interests of its users. Ultimately, GBTC is part of the Digital Currency Group, which makes money from the 2% fees charged to GBTC investors.

The above issues are at the heart of a recent lawsuit by Fir Tree Capital Management.

Fir Tree filed a lawsuit against Grayscale on December 6 in the Delaware Court of Chancery in an attempt to force Grayscale to lower its fees, initiate share redemptions and hand over documents related to its relationship with Digital Currency Group.

Source: Hedgeweek.com

Fir Tree argues, quite rightly in my opinion, that there is no legitimate reason for GBTC not to allow redemptions or even allow investors to convert their holdings to fiat. GBTC also charges a 2% fee on the holding’s value, not the fund’s value, which can also be seen as unfair.

If GBTC actually took these measures, the discount to NAV would be reduced, and perhaps even disappear. However, reducing fees or allowing redemptions is clearly not in the interests of fund managers.

GBTC is not Bitcoin

Grayscale offers a very convenient way to own Bitcoin, which is why investors put up with the fees. Also, there aren’t many options out there. However, it is important to understand that GBTC is not Bitcoin, and that it actually goes against the principles of Bitcoin, and one of the main reasons why Bitcoin is considered by many to be a superior form of money.

Anything that is not money itself is only a proxy, which in moments of need will be worth much less than the money itself. This is how it has been since the heyday, and this is how it is today.

This idea is better understood using concepts from the book Layered Money by Nik Bhatia. In the book, Bhatia describes money as a pyramid, where the top of the purest forms of money (gold) takes the top of the pyramid and then successive layers are added below with less “real” money.

Under the gold standard, central banks held gold, and then banks issued notes that could be redeemed for gold. However, these notes were not gold themselves, in fact they only promised to deliver gold. The US kept this promise for centuries, but eventually gave up on its gold commitments.

The gold-backed US dollar, a promise to provide gold, was only as good as the issuer’s word. Further down the ladder, debt issued by banks is also a form of money, but it is much less valuable, especially when there is a crisis of confidence. In this scenario, people seek safety in the higher forms of money i.e. gold and in the case of cryptocurrencies, Bitcoin.

The same comparison can be drawn between GBTC and Bitcoin. Bitcoin sits at the top of the pyramid as “digital gold” and GBTC is just an intermediary further down the pyramid issuing Bitcoin pledges, which are a lower form of money.

The demise of FTX has highlighted these issues. What would happen to GBTC if the parent company faced liquidity problems? Or what could happen if Coinbase, which supposedly has GBTC’s Bitcoin, ran into trouble?

One of the main features of Bitcoin is that it gives everyone unfettered access to the highest form of money, Bitcoin itself.

Final thoughts

GBTC is a lower form of Bitcoin, but that doesn’t mean it’s in danger, in my opinion. I have no reason to believe that funds are being mismanaged at GBTC or Coinbase, and these are two large public institutions that would face consequences if something were to happen. I have a small position in GBTC myself and ultimately I think we will see GBTC drop its discount and even trade at a premium as it once did before. Still, this doesn’t change the fact that GBTC is an inferior way to own Bitcoin.