Investors Who Bet on Bitcoin in Retirement Accounts Lose Money

For years, individual investors have used the Grayscale Bitcoin Trust to bet on bitcoin in their retirement accounts. Now they are paying the price.
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The GBTC trust is one of the few options for individual investors to get exposure to bitcoin without having to purchase the cryptocurrency directly. The trust is worth $14.6 billion and is a popular choice for investors looking to get involved in bitcoin.
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However, GBTC does not have a redemption program like an exchange-traded fund. GBTC investors can sell their shares on the open market, but they cannot redeem their shares for bitcoin. This results in the fund's shares trading at a premium or discount to the underlying value of the bitcoin it holds.
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George Bodine, a 66-year-old retired airline captain in Covington, Ky., bought five-figures worth of GBTC shares for his retirement account in 2020. At the time, bitcoin was rising rapidly alongside other risky asset classes. However, in February 2021, the fund's premium flipped to a discount in response to the launch of the first spot bitcoin ETF in Canada.
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On Thursday, GBTC was trading at a 42% discount to bitcoin's price of around $23,000. This means that GBTC was only trading at around $13,000 even though bitcoin was worth $23,000.
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If Mr. Bodine sold his shares now, he would net half of the money he spent on acquiring them, he said. While Mr. Bodine remains in the fund in hopes that its value rises, he continues to be responsible for a 2% annual fee.
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"The problem with GBTC is that it has become like Hotel California," Mr. Bodine said. "You can check out any time you like, but you can never leave. You can sell, but you can't redeem those shares."
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In 2013, Digital Currency Group Chief Executive Barry Silbert launched GBTC with the look and feel of an ETF. This meant that shares of the fund could be created and redeemed simultaneously to keep pace with market demand. However, GBTC halted its redemption program in 2014 after the Securities and Exchange Commission deemed that it violated financial regulations. In 2016, the trust received a cease-and-desist order related to the redemption program from the SEC.
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Michael Sonnenshein, chief executive of Grayscale Investments, said the firm always envisioned GBTC would evolve into an ETF. He believes that the continued maturation of the U.S. regulatory environment for bitcoin would result in crypto-based ETFs.
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As an ETF, market makers known as authorized participants would be able to create and redeem shares of GBTC in order to keep the price in line with the underlying value of the bitcoin it holds. This would ensure that investors are getting a fair price for their investment.
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The SEC has so far rejected Grayscale and others' applications for a spot bitcoin ETF on the grounds that such products are vulnerable to fraud and market manipulation.

The regulator has only allowed ETFs tracking bitcoin futures to come to market. In June, Grayscale sued the SEC. The District of Columbia Court of Appeals is scheduled to hear oral arguments in Grayscale's lawsuit on March 7.
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Tim Hooker, co-founder of Dynamic Wealth Solutions in Southfield, Mich., is among those advocating for GBTC’s transformation into an ETF. His registered investment-advisory firm manages $58 million in assets and owns about $266,000 of GBTC shares spread across 22 client accounts.
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Mr. Hooker, 32 years old, said he acquired these GBTC shares for clients who wanted bitcoin exposure in their portfolios in 2019. He picked GBTC because it was the only bitcoin fund available for individual retirement accounts. The fund was trading at a 15% to 20% premium to net asset value at the time, he said.
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He told clients that if GBTC converts to an ETF, there is potential to make a quick 40%. This is referring to the potential closure of the GBTC discount in the event of an ETF conversion.
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According to Mr. Hooker, his clients would lose 21% or approximately $55,000 if they sold their GBTC shares at this time. He stated that he only purchased GBTC shares for clients who have a high tolerance for risk and does not recommend that clients invest more than 3% of their portfolios in the fund.
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If GBTC fails to transform the trust into an ETF, Grayscale's Mr. Sonnenshein has said the firm would explore a tender offer for up to 20% of the fund's shares outstanding. This would give shareholders the opportunity to sell their shares back to the company at a set price.
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Daniel Sangyoon Kim, 28, a software-startup founder in San Francisco, bought five-figures worth of GBTC shares in his IRA in 2020. He sold them all at a discount after the collapse of crypto exchange FTX in November, losing more than $10,000, he said.Kim said that he bought the GBTC shares in his IRA because he believed that the crypto market would rebound after the FTX collapse. However, he sold all of his shares at a discount after the market failed to rebound, resulting in a loss of more than $10,000.
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Mr. Kim, who worked at venture capitalist Tim Draper’s eponymous firm, said the financial troubles brewing at Grayscale’s sister company, crypto lender Genesis Global Capital, gave him pause. He was concerned that the same problems could arise at Grayscale.
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This month, Genesis filed for bankruptcy after pausing withdrawals on Nov. 16. This froze approximately $900 million of retail funds that had been lent to Genesis by Gemini's "earn" program. On the same day that Genesis halted withdrawals, Gemini sold over 30 million shares of GBTC to a private buyer at a discount. This transaction partially pushed down GBTC's discount rate to a record 50% in December, according to crypto investors and analysts. A spokeswoman for Gemini did not respond to requests for comment.
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"I've seen a lot of bad things happen over the past year," Mr. Kim said. "FTX's user agreement literally says they wouldn't touch your funds. If you see these sketchy things happening, how can you feel safe about anything?"
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According to Grayscale's Mr. Sonnenshein, Genesis is an affiliate firm to Grayscale and not a counterparty or service provider for GBTC. He stated that Genesis "does not impact any of our products' operations."
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Mr. Kim said he was willing to buy back some GBTC shares after Coinbase Custody vouched for the security of Grayscale's digital assets held there.
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However, he is no longer able to make the purchase in his Vanguard IRA account because Vanguard changed its policy in April 2022 to prohibit the purchases of most

OTC securities, such as GBTC, according to its website.
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"I still invest in bitcoin," Mr. Kim said. "I just buy them directly whenever I want to invest more."