A retirement account that invests in Bitcoin Funds pays a steep price

Compared to its underlying assets, Grayscale Bitcoin Trust sells at a 42% discount

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The Grayscale Bitcoin Trust has been used by individual investors for many years as a way to bet on bitcoin through their retirement accounts. The price is now being paid by them.

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Individual investors could gain exposure to bitcoin without directly purchasing the cryptocurrency by investing in the trust, known as GBTC, worth $14.6 billion. 

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In contrast to exchange-traded funds, GBTC does not have a redemption program. The fund's shares trade at a premium over the underlying value of the bitcoin it holds as investors are unable to redeem them for bitcoin on the open market. As a result, the fund's shares trade at a discount to bitcoin's underlying value. 

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He bought GBTC shares for his retirement account at a 10% premium when the fund traded at a premium in 2020, said George Bodine, 66. Along with other risky asset classes, bitcoin was rising rapidly at the time. In February 2021, a spot bitcoin ETF launched in Canada, causing the premium to reverse to a discount. 

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A 42% discount was recently offered on GBTC to bitcoin's price of around $23,000.

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In fact, Mr. Bodine said he would be able to recoup half his investment money if he sold his shares now. The fund's fee of 2% continues to be a burden for Mr. Bodine despite his hope that its value will rise in the future.

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“What's wrong with GBTC is that it's now Hotel California now,” Mr. Bodine pointed out. It's okay to check out whenever you want, but you can't leave. You can sell, but you can’t redeem those shares.”

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According to CEO Barry Silbert, GBTC can be issued and redeemed simultaneously to keep up with market demand, and is designed to look and feel like an ETF. As a result of a Securities and Exchange Commission determination in 2014, GBTC discontinued its redemption program. The SEC ordered the trust to cease and desist from its redemption program in 2016.

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Grayscale Investments CEO Michael Sonnenshein said the firm always "envisioned GBTC becoming an ETF, believing that the maturation of U.S. regulations for bitcoin will result in crypto-based ETFs."

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To ensure that GBTC shares reflect the underlying value of the bitcoin it holds, authorized participants will be able to create and redeem shares of the ETF. 

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As of so far, Grayscale and others have been denied applications for spot bitcoin ETFs due to their potential for market manipulation and fraud. The regulator has only approved ETFs that track bitcoin futures for trading. Grayscale filed a lawsuit against the SEC in June. Grayscale's lawsuit is scheduled for oral arguments on March 7 before the District of Columbia Court of Appeals.

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Dynamic Wealth Solutions co-founder Tim Hooker of Southfield, Mich., is advocating for GBTC to be turned into an ETF. He owns $266,000 of GBTC shares across 22 client accounts through his registered investment advisor, which manages $58 million in assets. 

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His clients wanted exposure to bitcoin for their portfolios in 2019, according to Hooker, 32. As the only bitcoin fund available to individuals for retirement accounts, he chose GBTC. Approximately 15% to 20% of the fund's net asset value was being traded at the time, he said. 

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The GBTC discount might become unavailable in the event that an ETF conversion takes place, but it may be possible for you to make an easy 40%,” he told clients. 

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GBTC shares would drop by 21% or about $55,000 if his clients sold them now, according to Hooker. In addition, he recommends that clients allocate no more than 3% of their portfolios to the fund if they have a high risk appetite. 

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According to Grayscale's Mr. Sonnenshein, if GBTC does not become an ETF, Grayscale may make a tender offer for up to 20% of the trust's shares.

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GBTC shares were purchased in his IRA in 2020 by Daniel Sangyoon Kim, 28. In November, when crypto exchange FTX collapsed, he sold them all at a discount, losing more than $10,000. 

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He expressed concern over Grayscale's sister company, crypto lender Genesis Global Capital, which he worked at at venture capitalist Tim Draper's eponymous firm. 

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A pause in withdrawals on Nov. 16 caused Genesis to file for bankruptcy. Genesis was lent $900 million by the "earn" program of crypto exchange Gemini. According to Genesis' bankruptcy filing, Gemini sold over 30 million shares of GBTC to a private buyer on the same day Genesis stopped withdrawals. As a result of the transaction, GBTC's discount rate in December dropped to a record 50%, crypto investors and analysts claim. Attempts to reach Gemini's spokesperson went unanswered.

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“There have been a lot of bad things that have happened over the past year,” said Mr. Kim. FTX specifically states in its user agreement that they will not touch your funds. With all these strange things happening to your money, how can you feel safe?

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Grayscale's Sonnenshein said Genesis is not GBTC's counterparty or service provider, but it is an affiliate of Grayscale. As far as our products are concerned, Genesis has no effect on their operations, according to him.

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Grayscale's digital assets are stored at Coinbase Custody, which vouched for the security of Grayscale's digital assets after Coinbase Custody vouched for the security of Grayscale's digital assets. 

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However, he no longer has access to his Vanguard IRA account to make the purchase. GBTC was prohibited from being purchased by Vanguard starting in April 2022, according to its website. 

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“Even now, I still hold a lot of bitcoin,” Mr. Kim concluded. “But I just buy them directly whenever I want to buy some more.”

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