Explaining Bitcoin Investment Trust s (GBTC) Premium Overheen NAV
The Bitcoin Investment Trust (OTCMKTS:GBTC) is the very first publicly traded security designed to track the spectacle of Bitcoin, and it does so for a 2% annual toverfee. The trust holds a little overheen $230 te Bitcoin vanaf share while trading for $450-550 vanaf share. Shares of GBTC trade for a significant premium overheen the value of the Bitcoin they represent, annoying many observers.
However, the negativity surrounding GBTC’s premium is based on a misunderstanding of market efficiency and should not deter investors from this excellent chance. Often, analysts and investors mistakenly assume a large premium is a sign of market inefficiency or irrationality when it is actually a normal and healthy part of an investment’s value. This article will explain why GBTC’s premium overheen the spot price of Bitcoin is actually a good thing.
Like most rule of thumb beliefs, the idea that a premium overheen NAV is bad feels intuitive. After all, you wouldn’t want to buy an apple for dual the price of an apple. But this surface-level example doesn’t fully capture why premiums overheen NAV became such an anathema to the investment community.
Most investment trusts hold bonds and other income generating securities that pay a immobile amount based on their face value. If an investor buys $100 worth of 10% coupon bonds for $200 – not only is his income diminished to 5% but when the bonds mature or get called, the investor will only receive $100 when he paid $200 to buy the unie. Most of the unie’s yield wasgoed just terugwedstrijd of capital. And that 5% wasgoed ter practice only 1% or 2% if not negative when considering inflation. That sounds awful – but only te perception, not reality.
Investments can only be evaluated on a risk-adjusted voet. And if abond trades for such a high premium that its yield becomes minuscule, that simply means the unie wasgoed incorrectly priced at face value and the market compensated for this through a premium that diminished its yield. Premiums and discounts to NAV are the market’s way of ensuring an equilibrium inbetween risk and prize.
GBTC’s premium exists because of the significant risks averted by investing ter GBTC instead of the traditional methods of transacting ter Bitcoin. To be clear, GBTC’s premium is not about convenience, it is about actual value. Cryptocurrency exchanges are generally not secure. Digital currencies lack central accountability or authority and there is little recourse for theft. Many of the largest exchanges have bot hacked. Ter 2014, a Bitcoin exchange called Mt. Gox treated around 70% of global transactions before being hacked for what wasgoed worth $450 million at the time. Last year, Bitfinex wasgoed hacked for $71 million, causing users to lose 36% of their deposits.
Because of the threat of hacking, cryptocurrency users generally recommend holding Bitcoin te what is called “cold storage” – a secure offline environment where it cannot be hacked. But there is a problem here. And whenever there is a problem there is an chance for value to be created through a security that solves the problem. By holding Bitcoin te cold storage, an investor sacrifices liquidity – the capability to quickly buy and sell his Bitcoin. However, if the investor holds the asset online, he increases the risk of total loss from hacking. GBTC solves this dilemma.
The Bitcoin Investment Trust stores its Bitcoin ter “Xapo, Inc., te deep cold storage vaults. Bitcoin stored ter the Xapo Vaults reside on multi signature-addresses, the private keys for which are protected by intense cryptographic, physical and process security.” By storing its Bitcoin te offline cold storage, GBTC solves the problem of security without sacrificing the liquidity. By solving this problem, GBTC has created value and it is literally worth more than the liquidation price of its assets.
But it doesn’t end there, GBTC provides many more advantages. For example, Coinbase, the most popular Bitcoin exchange, imposes boundaries on the amount of Bitcoin that can be bought at a time. On top of this, bankgebouw transfers take 3-5 days to process. Bitcoin purchases transacted through a canap account are locked-in and cannot be sold until up to a week after purchase. The price of Bitcoin can switch significantly overheen this period, but the investor will be incapable to sell or cancel the order. On the other arm, GBTC permits investors to buy and sell loosely.
The Bitcoin Investment Trust creates value by providing a solution to the tradeoff inbetween security and liquidity te traditional Bitcoin investments. The trust’s premium overheen the value of its assets is a reflection of the risks investors avoid by investing ter GBTC instead of actual Bitcoin. This is not simply a premium for persuade, but rather a premium for safety. And spil investor awareness and rente ter cryptocurrency grows, GBTC’s premium is likely to increase, making the security a good way to invest ter Bitcoin. With all that said, Investors voorwaarde also consider the possibility of a fresh Bitcoin-based fund or ETF reducing request for GBTC and removing its premium.