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If you have clicked on this article, you almost certainly expected a prediction for the price of Bitcoin Investment Trust (NASDAQOTH: GBTC). Unfortunately, the article is not able to offer such a forecast and there is a good reason: in my opinion, within the next five years, the Bitcoin Investment Trust will no longer exist, as the sponsor of trust , Grayscale Investments, will have closed it.
What is the Bitcoin Investment Trust?
Bitcoin Investment Trust, of which I will refer later with its ticker, GBTC, is an open-end investment trust with the goal of reflecting bitcoin price performance, minus commissions. GBTC invests only in bitcoins; when you buy a stake in the trust, you become the owner of 0.00099063 of a bitcoin (as of the end of November). Note that this fraction must decrease over time, as the trust will regularly sell some of its holdings in order to pay a generous 2% annual "sponsor commission".
Image source: Getty Images.
Here is the process – which I consider irreversible and already in place – that I believe is forcing the investment in grayscale to close the GBTC:
Phase 1: the recent performance of Bitcoin Investment Trust was horrendous
It was the carnage in the cryptocurrency complex in 2018. The following chart speaks for itself: GBTC suffered brutal losses this year – even worse than the bitcoin ones.
Bitcoin Close Prices given by YCharts.
This chart, which anticipates the impact of recent GBTC lows, is even more significant:
GBC Data of YCharts.
Essentially all the new buyers of GBTC in the last 18 months that continue to hold the fund today are at a loss for their position.
(In the last 18 months, the GBTC was trading below the closing price of $ 4.05 in just 10 trading days: four of these occurred this month and the remaining six occurred before August 2017).
Step 2: Bitcoin Investment Trust owners awaken to their punitive commission
At 2.00% per annum, the "share of the sponsor" of Bitcoin Investment Trust is extraordinarily high. Keep in mind that this is a product of an index that only aims to track the performance of bitcoins. For reference, the expense ratio 0.04% of the ETF Vanguard S & P 500 is one fiftieth of the GBTC commission. Even the SPDR Gold Shares the cost ratio of 0.40% is only a fifth. It would be fun to listen to grayscale investments to try to explain why a supposedly frictionless digital currency is more expensive to exchange and store than a physical metal.
The rates immediately gain visibility in a wild bear market, particularly when they are excellent. Speculators do not even think about an annual commission of 2% during the phase of the "lunar rocket" of a speculative bubble, but forcing them to pay 2% to a consultant for the privilege of seeing their capital go up in smoke is to add insult to damage.
Phase 3: a fall in prices and outflows of funds will diminish the assets managed by Bitcoin Investment Trust
Starting November 30, GBTC has $ 826.3 million of assets under management; on this basis, the annual portion of Grayscale would still amount to $ 16.5 million. However, GBTC's activities will continue to plunge over the coming months and years, thanks to two interrelated factors: outflows of funds and further drops in the price of bitcoins. The outflows of funds will result from the losses mentioned above and from those that will come again when the price of a bitcoin returns to its intrinsic value: zero.
Why am I sure that bitcoin will eventually go to zero? Because the digital currency does not confer any right to any activity or cash flow and has no other practical application except as a speculative vehicle. The purchase of a bitcoin today is not much different from paying $ 3,500 for an empty Starbucks card in hopes of finding someone who will buy it from you at a premium.
(True, the bitcoin has a better history than empty Starbucks cards: the revolution of the financial system and the rendering of obsolete banks surely capture the imagination.Unfortunately, no story is compelling enough to levitate an empty speculation forever.)
When will grayscale investments close GBTC?
Given the rich tariffs that Grayscale Investments is making with the Bitcoin Investment Trust, we can expect it to resist closing the fund until this is unavoidable. At some point, the decrease in activities will mean that even a 2% annual fee is not cheap. There is no way of knowing exactly when this will happen, but five years should be more than enough for the process to be carried out.
As I see it, this is all the more certain as Grayscale's business is an "all in" bet on digital Beanie Babies … err, currencies. It is a "trusted authority" on investing in digital currency, and all its funds refer to digital currencies. As the air continues to escape from the cryptocurrency bubble, Grayscale's close concession will pay a heavy price for its dependence on a broken economic paradigm.
Alex Dumortier, CFA has no position in any of the stocks mentioned, nor in any of the cryptocurrencies mentioned. Motley Fool has no position in any of the stocks mentioned, nor in any of the cryptocurrencies mentioned. Motley Fool has a disclosure policy.
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