Bitcoin’s awe-inspiring rise to record highs has left investors racing for rally exposure – even if it means paying an absurdly high markup.
When the largest cryptocurrency first shot above $ 23,000 this week, the mania pushed the price of the Bitwise 10 Crypto Index Fund (ticker BITW) is a whopping 650% above the value of its holdings and is currently trading close to 350%, according to data collected by Bloomberg. Meanwhile, the premium is on the Grayscale Bitcoin Trust (ticker GBTC) swelled to 34% during the rally.
Such dislocations mean that both large institutional investors and mother-and-pop traders have to pay en masse to buy stocks, rather than outright buying the underlying holdings. But as Bitcoin’s 200% year-to-date rally attracts feverish attention and raises fears of further missing out on gains, the demand for anything with a crypto wrapper is skyrocketing. For investors looking to access Bitcoin but are reluctant or unsure of how to get direct exposure, the convenience of buying products such as BITW or GBTC through a brokerage platform trumps the additional cost.
“The answer is not as simple as ‘does it make sense to pay for that?’ in a vacuum. There’s absolutely no point in paying that premium, “said James Seyffart, a Bloomberg Intelligence ETF analyst.” But I think a certain premium is justified, and if you want access to Bitcoin, there really aren’t any better options. “
BITW is up 165% since then debut earlier this month, much faster than the gains in Bitcoin and Ether. GBTC is up about 40% over that period. That outperformance creates the gap between the prices of the products and the intrinsic value of their underlying positions.
Those dislocations occur occasionally in the $ 5 trillion exchange-traded fund universe – especially during periods of heightened volatility, such as in March – but rarely exceed 3% or so. When they do, specialist traders, known as authorized participants, step in to close the gap by creating or redeeming shares of the ETF.
Since the Securities and Exchange Commission has not yet approved the ETF format for cryptocurrencies, such intermediaries do not exist for the Bitwise and Grayscale products. Neither vehicle permits redemptions, meaning a fixed number of shares will be issued, although secondary offers are permitted by GBTC for institutional investors bringing in Bitcoin. Yet that can lead to dizzying discounts or premiums when supply and demand imbalances arise.
Companies engaged in crypto-related industries have served as proxy for exposure since 2017’s Bitcoin bubble. Investors took that to a new extreme when business intelligence firm MicroStrategy Inc. moved its treasury positions to the cryptocurrency in August, pushing its shares over double.
The bounties show “an overwhelming demand from investors to gain exposure to Bitcoin through means other than direct ownership or crypto exchanges,” said Nate Geraci, president of the ETF Store, an investment advisory firm. “It is absolutely baffling that regulators are giving private investors access to these products but not allowing a Bitcoin ETF that would easily solve the premium problem.”
A rough calculation suggests that at a premium of 34%, investors will pay the equivalent of $ 30,522 if the price of Bitcoin is $ 22,800 per coin. At BITW’s premium of 358% – which doesn’t just include Bitcoin – that total rises to $ 104,424.
Still, for investors looking for crypto exposure in retirement accounts or other wallets, buying shares of BITW or GBTC is likely seen as the easiest way beyond using a digital asset trading platform, Seyffart said.
“If you want Bitcoin in your existing IRA brokerage, the easiest way is through GBTC,” Seyffart said. ‘That does not mean advisers can’t learn how to run crypto apps or Cash app, but if you want to get Bitcoin into existing old financial systems – where almost all the money is – you need something that works in that system. “
– With the help of Vildana Hajric