The astonishing rise of Bitcoin to records is prompting investors to fight for rally exposure – even if it means paying an absurdly high margin.
As the largest cryptocurrency rose for more than $ 23,000 for the first time this week, mania pushed the price Bitwise 10 Crypto Index Fund (ticker BITW) is up to 650% above the value of its holdings and currently trades almost 350%, according to data compiled by Bloomberg. Meanwhile, the first on Grayscale Bitcoin Trust (GBTC ticker) rose to 34% amid the rally.
Such dislocations mean that large institutional investors and mom-and-pop traders have to pay heavily to buy shares, compared to buying underlying holdings. But as the 200% year-to-date Bitcoin rally draws feverish attention and raises fears of further loss of earnings, the demand for anything to do with a cryptocurrency is booming. For those investors who are looking for access to Bitcoin, but who are reluctant or do not know how to get direct exposure, the ease of buying products such as BITW or GBTC through a brokerage platform outweighs the additional cost.
“The answer is not so simple as ‘does it make sense to pay for it?’ ”In a vacuum. It makes absolutely no sense to pay this premium, ”said James Seyffart, an ETF analyst at Bloomberg Intelligence. “But I think a certain level of premium is justified, and if you want access to Bitcoin, there really are no better options.”
BITW has grown by 165% since its inception debuts earlier this month, far exceeding earnings in Bitcoin and Ether. The GBTC rose by about 40% during that period. This overrun creates the gap between product prices and the net asset value of their underlying holdings.
These dislocations occasionally occur in the universe of the $ 5 trillion traded fund – especially in periods of high volatility, as in March – but rarely exceed about 3%. When doing so, specialist traders known as authorized participants intervene to arbitrate the gap by creating or capitalizing on ETF shares.
However, as the Securities and Exchange Commission has not yet approved the ETF format for cryptocurrencies, there are no such intermediaries for Bitwise and Grayscale products. No vehicle allows redemptions, which means that a fixed number of shares are issued, although secondary offers are allowed by the GBTC for institutional investors who contribute to Bitcoin. Even so, this can create staggering discounts or premiums when supply and demand imbalances occur.
Companies dealing with the cryptography-related industries have served as proxies for exposure to the 2017 Bitcoin bubble. Investors have taken this to a new extreme when the business intelligence firm MicroStrategy Inc. moved its treasury holdings to cryptocurrency in August, causing its shares to over double.
The first shows “the overwhelming demand from investors to get exposure to Bitcoin through means other than direct ownership or through cryptocurrency exchanges,” said Nate Geraci, president of the ETF Store, an investment consulting firm. “It’s absolutely amazing that regulators allow retail investors to access these products, but they won’t allow a Bitcoin ETF that would easily solve the premium issue.”
A rough calculation behind the envelope suggests that, at a premium of 34%, investors pay the equivalent of $ 30,522 if the price of Bitcoin is $ 22,800 per coin. At the first BITW of 358% – which does not only own Bitcoin -, it amounts to 104,424 USD.
But still, for investors looking for cryptocurrency exposure in retirement accounts or other portfolios, buying BITW or GBTC shares is probably seen as the easiest way out of using a digital asset trading platform, according to Seyffart.
“If you want Bitcoin in your existing IRA brokerage, the easiest way is through the GBTC,” Seyffart said. “This does not mean councilors can’t learn how to use cryptographic applications either Cash application, but if you want to get Bitcoin in the old financial systems that exist – where almost all the money is – you need something that works in that system. “
– With the assistance of Vildana Hajric