Bitcoin Exuberance Is Even More Dramatic in Its Lone Investment Trust

  • Grayscale Investments’ trust trades at double net asset value
  • ARK Investment’s Wood says her fund reduced bitcoin holdings

Olaf Carlson-Wee, chief executive officer at Polychain Capital, and Bloomberg's Cory Johnson discuss the recent volatility in Bitcoin and whether or not the digital currency is experiencing a bubble. They speak on 'Bloomberg Technology.' (Source: Bloomberg)

If you need evidence that bitcoin mania is getting extreme, look at the lone investment vehicle available to institutional investors.

Grayscale Investments’ Bitcoin Investment Trust, which trades over-the-counter in the U.S. and offers direct exposure to bitcoin, surged 85 percent last week, compared with the digital currency’s 17 percent increase. Those gains brought the fund known by its ticker, GBTC, to trade at more than twice its net asset value, the highest premium ever.

That has some long-term advocates of the cryptocurrency pausing.

“We took some profits on GBTC for the first time since 2015 because its premium to bitcoin became too extreme,” said Cathie Wood, the New York-based chief investment officer at ARK Investment Management, which oversees the first exchange-traded fund with exposure to the virtual currency. “There’s a scarcity value in GBTC because for us and for other investors, to buy an instrument, it has to be a financial security. The only way we can own bitcoin is through GBTC.”

GBTC’s premium surged as investors who can’t buy digital currencies flooded the fund as bitcoin climbed to new records. Blockchain assets are surging following multiple factors including, Japan saying it will recognize bitcoin as a legal payment method, Fidelity’s Abigail Johnson endorsing its use, and as evidence shows there’s growing adoption by companies and efforts to scale the technology. This all took place as industry leaders and enthusiasts joined in at least three highly attended conferences in New York last week.

Some of the barriers blocking institutional investors’ access are that Individual Retirement Accounts only accept financial assets, that most funds have internal liquidity or risk limits which bitcoin and other digital currencies may not meet, or that internal compliance or audits don’t approve of the assets. Also, some investors don’t want to go through what they perceive as risk and hassle of dealing with bitcoin wallets and exchanges.

Read more about the skepticism surrounding the surge in the price of bitcoin

Grayscale’s trust, which has just under $400 million in total assets, is one of the few alternatives institutional investors have. Channel Islands-based Global Advisors Jersey Ltd. provides a fund with indirect exposure to bitcoin and two exchange-traded notes that invest in the digital currency, which are listed in Sweden. Global Advisors Chief Executive Officer Daniel Masters says the interest is stronger in the exchange-traded products and his fund has seen rising inflows from wealthy individuals and family offices.

Attempts to list exchange traded funds that track bitcoin were initially rejected by the U.S. Securities and Exchange Commission on the grounds that the bitcoin market isn’t regulated, making it subject to “fraudulent and manipulative acts and practices,” but granted a request to review the decision.

ARK’s Wood said that while a bitcoin ETF might make sense in the future, the bitcoin market doesn’t have the volume or liquidity to withstand the demand that would come from an ETF, so GBTC might be the best way to go for U.S. investor in the near future.

“It’s going to be liquid enough, but we’re still in the very early stages,” Wood said. “A lot of people are worried that there’s a bubble, but I think this is just the beginning.”

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