For several years, individual investors have utilized the Grayscale Bitcoin Trust in their retirement plans. They are currently suffering the price. The $14.6 billion GBTC trust was one of the few ways private investors could gain exposure to bitcoin without needing to acquire the cryptocurrency directly.
However, GBTC lacks a redemption option comparable to an exchange-traded fund. Investors in GBTC can sell their shares on the open market, but they cannot redeem them for bitcoin. As a result, the fund’s shares trade at a premium or discount to the value of the bitcoin it owns.
In 2020, George Bodine, a 66-year-old retired airline captain from Covington, Kentucky, purchased five figures worth of GBTC shares for his retirement account at a 10% premium. At the time, bitcoin and other hazardous asset classes were increasing quickly. The premium became a discount in February 2021, partly due to the debut of Canada’s first spot bitcoin ETF.
On Friday, GBTC traded at a 41% discount to the price of bitcoin, which was around $23,000. According to Mr. Bodine, if he were to sell his shares now, he would recover half of the money he paid to acquire them. While Mr. Bodine stays invested in the fund in the hopes that its value will increase, he continues to pay an exorbitant 2% yearly fee.
According to Mr. Bodoine, the issue with GBTC is that it has become “Hotel California.” Mr. Bodine stated you might check out anytime, but you can never leave. You may sell these shares, but you cannot redeem them.
Barry Silbert, chief executive officer of Digital Currency Group, introduced GBTC in 2013 with the appearance of an ETF, meaning that shares of the fund may be produced and redeemed concurrently to meet market demand. The Securities and Exchange Commission terminated GBTC’s redemption program in 2014 because it breached financial laws. In 2016, the SEC issued a cease-and-desist order to the trust about its redemption program.
Michael Sonnenshein, CEO of Grayscale Investments, stated that the company always anticipated GBTC would grow into an ETF, thinking that the continuous maturing of the U.S. legal framework for bitcoin would lead to crypto-based ETFs.
To ensure that GBTC represents bitcoin’s underlying value, market makers can issue and redeem shares as an ETF. The SEC has thus far denied Grayscale and others’ requests for spot bitcoin ETFs because such products are susceptible to fraud and market manipulation. The regulator has only permitted bitcoin-tracking ETFs to enter the market. Grayscale sued the SEC in June. On March 7, the District of Columbia Court of Appeals will hear oral arguments in Grayscale’s complaint.
A Southfield, Michigan, entrepreneur, Tim Hooker, is among those advocating for GBTC to become an ETF. His registered financial advice business, which manages a total of $58 million in assets, has around $266,000 worth of GBTC shares across 22 client accounts.
Mr. Hooker, 32 years old, stated that he purchased these GBTC shares in 2019 for clients who desired bitcoin exposure in their portfolios because GBTC was the only option for bitcoin funds for individual retirement accounts. At the time, he claimed the fund was trading at a 15% to 20% premium to its net asset value.
It’s not the best, but if it converts to an ETF, you may make 40%, he reportedly advised clients, insinuating that the discount would be closed if it converted to an ETF. Mr. Hooker stated that his customers would collectively lose $55,000 or 21% if they liquidated their GBTC shares immediately. Clients should not devote more than 3% of their portfolios to GBTC, and he only purchases the fund for those with a high-risk tolerance. Mr. Sonnenshein of Grayscale has stated that if GBTC fails to convert the trust into an ETF, the business will consider a tender offer for up to 20% of the fund’s outstanding shares.
Daniel Sangyoon Kim, a 28-year-old founder of a software business in San Francisco, invested five figures in GBTC shares in his IRA in 2020. Following the collapse of the crypto exchange FTX in November, he sold them all at a discount, losing more than $10,000, he added.
Mr. Kim, a former employee of venture investor Tim Draper’s namesake firm, expressed alarm over the financial difficulties plaguing Grayscale’s sister business, cryptocurrency lender Genesis Global Capital.
This month, Genesis filed for bankruptcy after suspending withdrawals on November 16. The decision froze around $900 million of customer cash granted to Genesis under the “earn” program of the cryptocurrency exchange Gemini. According to Genesis’ bankruptcy complaint, Gemini sold approximately 30 million GBTC shares to a private bidder at a discount on the same day Genesis ceased withdrawals. According to cryptocurrency investors and analysts, the deal lowered GBTC’s discount rate to a record 50% in December. Gemini’s spokesperson did not reply to calls for comment.
Mr. Kim stated over the past year; the nation witnessed an abundance of unfortunate events. The FTX user agreement states that they will not touch your funds. How can you feel safe about anything if you’ve previously witnessed these shady occurrences? Grayscale’s Mr. Sonnenshein stated that Genesis is Grayscale’s affiliate, not GBTC’s counterparty or service provider. Genesis does not affect the operation of any of our goods, he claimed.
Mr. Kim stated that he was prepared to repurchase certain GBTC shares once Coinbase Custody, which houses GBTC’s bitcoin holdings, attested to the safety of Grayscale’s digital assets stored there.
However, he can no longer make the transaction through his Vanguard IRA. According to its website, Vanguard revised its policy in April 2022 to restrict the acquisition of most OTC securities, including GBTC.
Mr. Kim stated that he still possesses a great deal of bitcoin. He added that he might simply purchase them directly whenever he needs more.
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