By Michael Ide. Originally published at ValueWalk.
Wedbush has initiated coverage of Bitcoin Investment Trust with an Outperform rating and a $40 price target (currently $30.45), but the investment thesis has everything to do with Bitcoin and nothing to do with the rather expensive financial product that’s being offered.
“GBTC is a NASDAQ OTCQX listing of the Bitcoin Investment Trust which holds BTC and serves as a proxy for the price of BTC at a 1/10 ratio. We expect GBTC to trade at a slight premium to BTC as the publicly traded liquidity benefit is only somewhat offset by the 2% management fee,” write Wedbush analysts Gil Luria and Aaron Turner.
You read that correctly, GBTC charges 2% for passively holding an asset that you can easily buy yourself.
GBTC has far lower trade volumes than Bitcoin itself
This isn’t about Bitcoin, which you probably already have an opinion on and which we’ve covered at length if you haven’t. Luria and Turner are bullish, as are plenty of other smart people. This is about fees, and people giving up value for no particular reason.
GBTC holds Bitcoins and then sells shares at a 1/10 ratio, so you would expect each share of GBTC to trade at about a tenth of the value of a Bitcoin. Right now, GBTC is trading at $30.45 and a Bitcoin for $283.90 on Coinbase, so you’re paying a 7% premium right off the bat. The idea that the premium is due to higher liquidity is nonsense, Bitcoin transactions have an order of magnitude more volume than shares of GBTC, which sometimes trade just a couple of hundred times per day.
(Chart from Coinbase)
People are paying a lot for convenience
Maybe it’s just that people aren’t really sure how to go about buying Bitcoin since they can’t buy through Charles Schwab Corp (NYSE:SCHW) (though you can buy GBTC there), or maybe they have security concerns about managing a Bitcoin wallet. But paying a 7% premium on top of a 2% management fee for the convenience of going through your usual online brokerage is crazy.
Luria and Turner seem to think that GBTC will still command a premium a year from now and they may be right, but it’s not going to last forever. The New York Stock Exchange has launched a Bitcoin index, and while there hasn’t been any activity so far it’s designed for writing options. There’s also the Winklevoss Bitcoin ETF that should be launched this year. If interest from mainstream investors ever picks up GBTC will face competition, and undercutting the 2% management fees isn’t much of a challenge. Anyone holding GBTC shares when its price converges to 1/10 the price of Bitcoin will take a hit that could have been easily avoided.
Of course, this being Wedbush, the story is less surprising.
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