Should you use Grayscale Bitcoin Trust to invest in cryptocurrency?

When it comes to investing in bitcoin, you have two basic options. You can buy and hold bitcoins directly, or you can use another type of vehicle that invests in bitcoins on behalf of investors. Since there are no Bitcoin mutual funds or ETFs – at least not yet – that leaves the Grayscale Bitcoin Trust (OTC: GBTC) as the primary way for investors to grow their money in bitcoin without having to purchase the digital currency themselves.

However, there are some things investors should know before deciding to buy stocks. On this November 30 crazy live music video, Fool.com contributor Matt Frankel, CFP, and Focus on industry host Jason Moser discusses the main downsides of using this alternative bitcoin investment instead of just buying the cryptocurrency itself.

Jason Moser: Let’s see. We have a question from Srinivas, who asks, what do you think of the crypto ETF GBTC? I don’t know yet, but I want to.

Matt Frankel: I do and would like to take this one.

Moser: OKAY. Well, go ahead.

Frankel: This is the Grayscale Bitcoin Trust.

Moser: Here.

Frankel: Currently, there are no Bitcoin mutual funds or ETFs. The Grayscale Bitcoin Trust is intended to fill this gap until the SEC actually approves a bitcoin-based ETF. It’s a way for people to get exposure to bitcoin without having to buy it. It works like a fund, where they pool investors’ money and buy bitcoins. The problem is that it trades at a huge premium to the value of the bitcoin it owns, like in the 20% to 30% range typically. I haven’t checked recently. But historically, it’s traded for at least a 20-30% premium to the value of the underlying bitcoin. So if you want to invest.

Moser: Why do you think this is? Why do you think they will do this?

Frankel: At first, I think it was because bitcoin was hard to buy, and it’s still not as easy to buy as some other assets. It trades at a huge premium and Grayscale charges a 2% fee per year for storing bitcoin. That’s a two percent management fee. This is quite a high fee in the world of ETFs and mutual funds. The premium costs make it – I would stay away. There are few situations where I would recommend buying real bitcoin, but this is one of them. If it’s between that, I buy bitcoin.

Moser: Yeah. I wonder if he has any funds owed. I mean, funds make investing more accessible for a lot of people. Maybe the demand for shares in this fund is higher than the value simply because, like you said, people think it’s an easier way to get the underlying asset without having to own it. Most people can’t necessarily go there and buy bitcoin without knowing a thing or two. All these electronic platforms like Square and PayPal only make that much easier.

Frankel: Yeah. I mean, if you look at ETFs that own gold, for example, they have management fees because it costs money to store, secure things like that.

Moser: Yeah.

Frankel: They usually trade at a premium to the value of the gold they own. Not 20-30%, but a bit more expensive. It’s just that the costs are, in my opinion, outrageous for the Grayscale Bitcoin Trust.

Moser: What is the cost of storage? I mean, I understand the cost of bitcoin hunting, the cost of bitcoin mining. But how much does storage cost? Isn’t it just memory?

Frankel: There are a lot of cybersecurity measures to take, a lot of equipment to buy. If you want to keep your bitcoin in cold storage, i.e. offline storage, you need a place to do so. I mean, it’s not a huge cost, but you need computer equipment. If you hold billions of dollars in bitcoin, you need some of the best cybersecurity operations in the world to help you out.

Moser: Yeah, I guess so.

Frankel: Because you don’t want it to be pirated and lost. If you remember the early days of cryptocurrency, you would hear about a breach of these and trade almost every two weeks, where about $100 million worth of cryptocurrency went missing and stuff like that. You don’t want that to happen. There are security fees. Like storing gold, you have to pay for the vault to keep it and stuff like that. I mean, there are costs associated with it. It’s not two percent, and that’s why they make a profit. But there is a certain cost to storing and keeping gold. As more and more investors put their money in, they have to buy bitcoin, which incurs fees.

Moser: Yeah. That’s a good point.

Frankel: There are costs associated with it.

This article represents the opinion of the author, who may disagree with the “official” recommendation position of a high-end consulting service Motley Fool. We are heterogeneous! Challenging an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and wealthier.

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