Bitcoin has surged in recent weeks an amazing 83% from $250 to over $450. ETF investors can gain exposure to the digital currency through the Bitcoin Investment Trust (GBTC) which has ridden that price surge and is up 85% just since last Thursday, gaining 27.88% just today.
We caught up with Barry Silbert, CEO and Founder of Grayscale – the firm behind GBTC (and a wholly-owned subsidiary of Digital Currency Group), to discuss what’s behind the bitcoin explosion.
Why is the sudden surge in interest in bitcoin?
We are seeing and experiencing all-time high trading volumes on global exchanges. In contrast to the bitcoin bubble of 2013, where almost all bitcoin trading activity was centralized on a single exchange, today, bitcoin is accessible via a plethora of exchanges, trading desks, and order books, not to mention that there are now investment vehicles such as the Bitcoin Investment Trust (symbol: GBTC). This translates into bitcoin being orders of magnitude easier to access than ever before, both in the developed and developing world. Of note is the surge in bitcoin exchange volume taking place in China. This can be attributed to a variety of factors including the ability to transfer value into bitcoin (and out of the devalued yuan), a currency that returns trust and power back to the individual, not to mention may thwart capital controls.
Over the last few years, we’ve also seen a surge in interest in bitcoin and blockchain companies from venture capitalists. While VCs may not always chose the right companies to back, they are almost always spot on when identifying themes or industries to invest in. Now, we’re experiencing a surge in corporate venture interest. My firm, Digital Currency Group, just announced its capital raise which included MasterCard, CME Group, Bain and Transamerica among others. This, combined with other corporate venture groups including Visa, American Express, not to mention most if not all of the global banks (Goldman Sachs, UBS, BBVA) investing in bitcoin start-ups and/or developing incubators has given the entire digital currency space a huge boost in morale. Globally, many of the companies receiving funding are driving buy-side demand to experiment and test new applications that utilize bitcoin and blockchain. These include identity management solutions, internet of things applications, and the digitizing of various assets, be it financial instruments or deeds to real estate.
What makes GBTC unique? Why would one want exposure via an ETF-like product?
Purchasing bitcoin outright can be a challenging experience for many investors. More often than not, they don’t know who purchase bitcoin from, what price they should pay, or how to store bitcoin safely and securely. Storing bitcoin on one’s own comes with a unique set of issues. For example, if bitcoin holders are hacked or lose the private key, which gives them access to their bitcoin wallet, they have zero recourse.
Purchasing shares of the Bitcoin Investment Trust (symbol: GBTC), however, gives investors the ability to gain exposure to bitcoin with built in security and storage and through a titled security in the investor’s name. Consequently, shares are eligible to be passed onto beneficiaries under estate laws and are eligible to be held in certain IRA, Roth IRA, and other brokerage and investment accounts (this is not possible when purchasing outright bitcoin). The Bitcoin Investment Trust has also brought together a fantastic group of service providers. The Trust’s assets are custodied by Xapo Inc., its financial statements are audited annually by EY LLP, and shares of the Trust are marketed and distributed through a FINRA-registered broker-dealer.
Each share of the Bitcoin Investment Trust represents approximately 0.1 bitcoin and shares are tied to a daily 4pm net asset value that is representative of the bitcoin market price. Qualified accredited investors have the ability to purchase shares of the Bitcoin Investment Trust at the daily NAV through an ongoing private placement, however, these shares carry resale and transfer limitations. Both accredited and non-accredited investors have the ability to purchase shares of the Bitcoin Investment Trust on OTCQX under the symbol: GBTC. These shares have been deemed freely tradable and are subject to market driven price movement, which does not necessarily reflect the restricted shares’ daily NAV.
With both of these investor options, bitcoin exposure sits alongside existing investments (be it in a brokerage account, retirement account, etc.) and exposure to bitcoin is attained through a transparent and familiar experience. Additionally, as a titled security, the Bitcoin Investment Trust has resonated well with investors’ financial advisors, lawyers, and accountants, all of whom seem to favor investing through a security structure versus bitcoin outright.
The premium on GBTC has come in substantially…can you comment on the premium?
My team and I were very excited to see the Bitcoin Investment Trust debut on the public markets in May of this year. Since that time, symbol: GBTC has consistently traded a premium to the NAV, although over the last few weeks the premium has come in substantially, more closely mirroring the NAV price and that of the bitcoin market price.
The premium in the public markets for GBTC shares is likely driven by several factors. First, there is a scarcity factor. The number of shares eligible to be bought and sold on the public markets is dependent on existing investors who have purchased restricted shares at NAV electing to sell their shares under rule 144, following a one-year hold period. Second, there is a novelty factor. As the first publicly-traded bitcoin investment vehicle, there are those investors who are eager to get involved and be part of the first wave of investors to access bitcoin via this type of structure. Third, there are investors who are eager to get involved in bitcoin, but who have wanted to do so using tax-advantaged capital, such as IRAs or 401Ks. Since this is not possible to do when purchasing bitcoin outright, the Bitcoin Investment Trust marks the first time that investors can gain exposure to bitcoin through these types of accounts.
We are very encouraged by the response to symbol: GBTC in the public market. We are experiencing all-time high investor interest and trading volumes. In fact, yesterday, we traded almost 72k shares representing over $3.2MM in notional value. This not only reflects increased interest from individual investors (many of whom are putting tax-advantaged capital to work in bitcoin via their IRAs, ROTH IRAs, etc), but institutional investors as well. NYC-based fund manager, ARK, has bought GBTC for two of their four ETFs. Finally, we’d argue that bitcoin has a place in qualified investor portfolios as a non-correlated asset and portfolio diversifier.
How will bitcoin behave in a rising rate environment?
Unfortunately, the jury is out and bitcoin is too nascent of an asset to say for sure. In the meantime, my team has been working on a correlation study, comparing bitcoin to various asset classes and fiat currencies. Our initial findings demonstrate that bitcoin is largely non-correlated, but you’ll have to see our full analysis when we publish it in the next few weeks.
What’s ahead for 2016?
2016 is going to be an important year for the digital currency ecosystem. I think we will continue to see increased institutional interest in the space. We’ve already seen an uptick in asset managers and hedge funds investing in the space, but I think this will ramp up in the months to come. Over the last year, there has been a consistent interest in blockchain technology, which underlies bitcoin, versus in the bitcoin as a currency. I believe that that narrative is already changing and will continue to gain strength into 2016. There will be an increased focus on bitcoin as a currency, as a payment rails, not to mention a plethora of other use cases we haven’t even imagined yet.