The Worst Way to Buy Bitcoin

A popular fund is trading for 105% more than its bitcoins are worth. This won’t end well.

This article originally appeared on Fool.com

Investing in bitcoin isn’t easy. It’s an online currency for the tech-savvy, difficult to buy and perhaps even harder to store safely. Thus, many investors and speculators have turned to an easier way to own bitcoin, the Bitcoin Investment Trust (NASDAQOTH:GBTC).

The Bitcoin Investment Trust was designed to make holding bitcoin as easy as buying a stock or exchange-traded fund. Traded over the counter, the trust holds about 0.093 bitcoin for each share outstanding. Owning a share is thus the equivalent to owning about one-tenth of a bitcoin.

But like anything, shares of the Bitcoin Investment Trust are governed by the laws of supply and demand, and eager speculators are willing to pay more for each share than the trust’s bitcoins are worth. The fund recently traded for $531 per share, or 105% more than the underlying bitcoin is worth, according to my calculations.

The Motley Fool

Why this happens

It isn’t unusual for closed-end funds to trade at a price that differs from their net asset value. Some funds trade at premiums, while the majority trade at a discount. But what is unusual is the size of the premium — a 105% premium is a massive outlier to the rest of the closed-end fund world. Historically, closed-end funds have traded for a 4.5% discount to their net asset value, on average.

The sponsor of the trust, Grayscale Investments, recently filed to list the trust on the NYSE Arca exchange, where you’ll find most legitimate ETFs. At the same time, it suspended the creation of new trust units, which means that there won’t be any new shares created, at least not any time soon.

Even when it was actively issuing new units, creation wasn’t keeping up with demand. Securities and Exchange Commission filings show it created only 31,400 shares in 2017 in the days leading up to its S-1 filing. With no new supply and an increasing amount of demand, the premium has widened quickly. Shares have traded at an average premium of 39% to underlying value of the bitcoin, according to my calculations.

Chart of GBTC's premium to net asset value

IMAGE SOURCE: AUTHOR.

A big risk

Speculators who pay a premium to buy shares of the trust are taking a big risk by assuming that the supply and demand imbalance is permanent. But things could change, and quickly: Bitcoin could fall out of favor, or speculators could find easier ways to buy and sell bitcoin quickly and in quantity. After all, as recently as April 13, shares traded at a mere 8% premium to NAV.

I find the premium difficult to justify. If anything, I’d argue shares should trade at a discount, given the trust’s 2% annual management fee that slowly eats away at the bitcoin backing each share per year.

Closed-end fund investors often capitalize high management fees at 10 times when valuing a fund. A fee of 2% per year capitalized at 10 times means shares should theoretically trade at a 20% discount to the market value of the underlying bitcoin. The share price would have to fall by as much as 60% to get to a 20% discount to their net asset value, assuming no change in the price of bitcoin.

I have no particular insight into where bitcoin will go from here, but I do know one thing: Fund premiums to net asset value have a tendency to revert to the mean. Investors who hold Bitcoin Investment Trust shares could thus stand to lose money even if bitcoin prices keep moving higher. Buyer beware.

Jordan Wathen has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

More on Investing

gold prices rise and fall
Tech Stocks

The Only 3 Stocks I’d Consider Buying in March 2026

March 2026 presents unique stock opportunities amid AI spending and geopolitical tensions. Learn which stocks to watch.

Read more »

RRSP (Registered Retirement Savings Plan) on wooden blocks and Canadian one hundred dollar bills.
Dividend Stocks

2 Dividend Stocks I’d Buy and Never Sell in an RRSP

Enbridge (TSX:ENB) stock and other proven dividend heavyweights to keep holding as a part of a top-notch RRSP income portfolio.

Read more »

Couple working on laptops at home and fist bumping
Dividend Stocks

1 Dividend Great I’d Buy Over Telus or BCE Stock Today

Explore the impact of regulations on BCE's and Telus's dividends. Here is a better dividend alternative for investors.

Read more »

dividend stocks are a good way to earn passive income
Dividend Stocks

2 Dividend Stocks for Canadian Investors to Hold Through Retirement

These companies have increased their dividends annually for decades.

Read more »

slow sloth in Costa Rica
Dividend Stocks

2 No-Brainer Dividend Stocks to Buy Hand Over Fist

Cargojet and Spin Master are two dividend stocks built for long-term growth. Here's why Canadian investors should consider buying both…

Read more »

dividend stocks bring in passive income so investors can sit back and relax
Investing

The Best Stocks to Buy With $1,000 Right Now

If you have $1,000 sitting on the sidelines, the current volatility in the TSX is the opportunity you’ve been waiting…

Read more »

young adult uses credit card to shop online
Dividend Stocks

3 Stocks to Double Up on Right Now

These three top Canadian stocks could double your investment in the years to come with their strong fundamentals, reliable dividends,…

Read more »

pig shows concept of sustainable investing
Investing

Your 2026 TFSA Game Plan: How to Turn the Contribution Room Into Monthly Cash

This TFSA strategy helps reduce risk while providing a decent yield.

Read more »