Be Wary Of This Skyrocketing Bitcoin Fund

June 05, 2017

Bitcoin is flying. Prices for the digital currency briefly topped $2,800 in May, the latest milestone in what's become a parabolic move higher. Consider these figures: In the past month, bitcoin is up 68%; year-to-date, it's up 154%; over the past year, it's up 350%; and over the past two years, it's up 973%.

But as incredible as those moves have been, the performance of one bitcoin fund makes them look paltry by comparison. That fund is the Bitcoin Investment Trust (GBTC), which has more than tripled in the past month alone, while rising an eye-popping 1,600% over the past two years.

2-Year Returns For Bitcoin And GBTC

 

The market value of the trust ballooned to as much as $1.1 billion in May, compared with $224 million at the beginning of the year.

Dangerous Premium To NAV

GBTC is an "open-ended trust" and the first publicly traded bitcoin investment vehicle. The fund made its debut on the OTC market in May 2015, and since then has been doing its best to track the price of bitcoin―with limited success.

Indeed, even though GBTC is a self-proclaimed open-ended trust (and its sponsor Grayscale has periodically created new shares), it's acted more like a closed-end fund, with huge premiums the norm.

The share price of GBTC was last trading at double the value of its underlying bitcoin holdings. At 131%, GBTC's premium to its net asset value is astronomical by any measure, and close to the highest level it's ever been. For investors buying into the fund, such large premiums are a disaster waiting to happen.

Premiums are a fickle thing, and can fluctuate wildly depending on the supply and demand for shares. For example, GBTC's premium has ranged from zero to 142%, with an average of 40%, since May 2015. 

 

 

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