Is GBTC Stock a Solid Long Term Investment?

Stock Market

The Grayscale Bitcoin Trust (GBTC) stock is a new way of investing in Bitcoin via the stock market. Traders could not trade with Bitcoin directly on the stock market for the longest time. One of the reasons for that was due to government restrictions. Most governments worldwide view Bitcoin and other cryptocurrencies as unregulated. One concern of unregulated crypto is that it can lead to money laundering. For you to trade with Bitcoin in the stock market, GBTC stock allows you to trade through a private trust. Under the trust, you trade with GBTC in the stock market instead of Bitcoin. Due to the ease of trading, GBTC held 654885 Bitcoin as of April 2021. That was proof that a lot of people heavily invested in crypto. Consequently, that made it the largest Bitcoin fund in the world. Since you can trade with it, is GBTC stock the way to go? To help you decide, we will compare reasons you should and shouldn’t invest in this cryptocurrency. In this way, you will be able to decide from an informed point of view.

Market Capitalization

By March 2022, GBTC Stock had a $21.1 billion market capitalization. That year, it surpassed the Fintech – Blockchain & Cryptocurrency, which had a median of $337.6 million. So, just how big of a deal is market capitalization? Market capitalization helps investors understand the relative size of a company compared with another. To understand company size, we need to identify three categories of market capitalization as follows:

  • Large-cap companies ($10 billion or more)
  • Mid-cap companies ($2-10 billion)
  • Small-cap companies ($300 million to 2 billion)

Having surpassed the $10 billion limit, GBTC Stock is a large-cap company. A company becomes a large-cap company due to certain factors like stability, steady growth, and consistent dividend payments. Any company that embodies those factors tends to attract investors who then raise its market capitalization. In most instances, the investors are from popular companies since they can invest more funds to increase the market capitalization than an individual investor. Therefore, a company using this crypto should be enough to push you to invest with it. Since many investors are choosing to trade with this product, it is a good idea to invest too. Traders only invest in a product that they feel has the potential to compete in the market. Also, investors will likely have considered what the product offers, and you will understand the benefits of its offers once you trade with the product.

You Will Not Have to Worry About How to Store Bitcoin

When you invest in GBTC Stock, you are not actually buying Bitcoin. Instead, you are gaining exposure to it in the form of security. Traders who choose to buy Bitcoin instead run into problems with how they will store it. Remember, Bitcoin is quite expensive to procure, and losing it would be a considerable loss. It is possible to lose it when someone hacks your Bitcoin wallet. Fearing this possible loss, you could pay someone to hold your crypto. However, you may hire an inexperienced person who may accidentally lose it. Furthermore, if there were no signed agreements between you and the person you hired, it would be challenging to present this case in court. Fortunately, your finds will be safe with Grayscale Bitcoin Trust since it is a trust company that answers to the US Securities and Exchange Commission (SEC). SEC protects the investors from facing such a loss by overseeing how the trust company stores and manages your investments. So, if GBTC Stock were to go bankrupt, you would be compensated. Most of GBTC’s funds are in offline storage platforms with Coinbase Custody Trust Company, LLC, as Custodian. The custodian is a fiduciary under § 100 of the New York Banking Law. Since it is legally allowed to run, there is a minimal chance that the custodian will engage in any form of mischief with your funds. If they did, then many investors would sue them, something they would not want to risk. So in a sense, you feel safe knowing nothing wrong could happen to your investments under their care.

Tax Breaks

The Internal Revenue Service (IRS) considers Bitcoin and other cryptocurrencies taxable. Bitcoin is considered “property” in the same way as assets like gold or stocks since they are also taxed. A common way people obtain Bitcoin rather than buy it is by mining it. When you mine Bitcoin, you get rewarded in coins or tokens for your hard work. Since these rewards are payouts, the IRS looks at them as taxable income. The IRS will tax you based on the number of rewards you have earned. Also, when you buy Bitcoin, you will indirectly pay tax on it. The IRS considers the sale of Bitcoin as an income-earning activity hence why it is taxed. In addition, when the seller sells Bitcoin, they will likely have sold it at a profit. Therefore, part of the profit will be taxed. Part of the reason people hardly invest in cryptocurrencies is the endless tax cuts. When you invest with this cryptocurrency, you will get tax breaks. Investors usually get tax breaks through a trusted company (like Grayscale Bitcoin Trust) instead of doing it alone. Therefore, investing with this trust company is a cheap way of gaining access to Bitcoin.

Plans to Convert GBTC Stock into an ETF

GBTC intends to convert GBTC Stock into an ETF since trading with GBTC is quite limiting. For instance, you cannot trade with it in the stock exchange market since it is not quite a coin. Instead, it simply indicates that you own some shares of Bitcoin. There are plenty of advantages to making GBTC Stock an ETF. As an ETF, GBTC Stock would trade like a stock. That means you would be able to buy or sell it. However, before deciding to trade with it, you would get access to reports on its performance in the stock market. That information would then help you not to trade blindly. There is a minimum amount you can trade within some cryptocurrency platforms. Sometimes, the minimum amount is still expensive for some investors. However, if the company converts its crypto into an ETF, you will not have to worry about a standard minimum amount. That means you would be able to purchase little bits of it, just like you would with stock. At the moment, GBTC Stock does not operate 24/7. This situation makes it limiting for traders who prefer to trade at night. They would have to wait for the next day to invest in the cryptocurrency. If the company converts its coin to ETF, you will be able to trade with it anytime you feel like it. Remember, when the stock exchange market closes, there is always a likelihood of the stock becoming volatile since no trading occurs.

Annual Charges

GBTC enjoys monopoly status since they seem to be the only ones allowing you to own Bitcoin through stocks. As a result, the company begins to frustrate its investors through fee increments, knowing they would have nowhere to go. For instance, they charge ongoing and upfront costs. Traders incur annual management fees at a 2% rate. Most traders find it asinine to charge the fees at that price for merely keeping their funds. Most traders will give up trading if the company does not address the concern. The move would lead to a reduction in its market capitalization since the traders will withdraw their investments. It, therefore, becomes risky for a new investor to trade with a company with a low market capitalization.

Safety Concerns

People love to trade with cryptocurrencies because they are decentralized. However, GBTC is not entirely decentralized despite being a cryptocurrency. For instance, GBTC’s custodian is the Coinbase Custody Trust Company LLC. Essentially, the responsibility of safeguarding the company goes to the custodian. The custodian holds the private keys, which give access to the digital wallets. It means there is a chance GBTC would suffer losses when the custodian becomes insolvent or gets hacked. GBTC could potentially give wrong audits to avoid stating why investors lost their funds to save face. As a trader, you have to hope nothing affects the custodian.

Discrepancies Between the Market Price and Actual Value

This was something that some traders noticed in 2018. When you choose to invest in this crypto, you have to pay premiums. Some traders would even pay as much as 100% on premiums or $2 for every Bitcoin exposure. Upon doing your math correctly, you will realize that buying Bitcoin can sometimes be cheaper than buying shares of it. Therefore, there is a chance that some traders will receive little returns on their investments in the long run. You could easily conclude that the GBTC management does not follow up with the Bitcoin trends. For instance, its price could be low in the market yet high on the GBTC platform. No investor invests their funds only to incur a lot of expenses. This inconsistency will make the investors seek other avenues for investing their funds. On the flip side, not keeping up with Bitcoin trends can be advantageous for the trader. For example, if its price was high in the market, then you may invest it cheaply with GBTC. Either way, you would want to work with a company that charges their product in line with the market trends.

Bitcoin Is Volatile Like Other Cryptocurrencies

Bitcoin may be the go-to crypto for trading, but it has also risen and fallen in the past. For instance, if the price of Bitcoin falls, then investors can expect to incur losses. Remember, the crypto is attached to Bitcoin since you pay to get some exposure to it. For instance, in 2022, Bitcoin suffered a 9% decline. As a result, GBTC Stock recorded a closing price of 26.5%, a value below that of Bitcoin. This decline was what made GBTC consider converting their crypto into an ETF. In addition, ETFs tend to be less volatile than most cryptocurrencies since they track the performances of broad market indices. As a result, you would invest in an ETF, expecting a more successful outcome.

A Lot of Shares Needed to Earn Bitcoin

GBTC shares allow you to own Bitcoin when you invest a certain amount. Traders, however, find the shares too small, and it will take most investors a long term to obtain them. For instance, in 2018, each GBTC share represented less than 0.001 Bitcoin. Therefore, you will need more than 1000 shares to earn Bitcoin. Meeting the 1000 shares threshold is tough. We have already established how volatile Bitcoin is. If consistency fell, it would be hard for you to reach that threshold limit. To prove how difficult it was to get the 1000 shares, we will again talk about GBTC’s performance in 2018. In 2018, GBTC experienced nearly a 65% decline. With that fall, some of the investors’ shares surely went down. You, therefore, have no choice but to wait for the shares to rise since shares are a game of chance. If the fall were to happen consistently, the crypto would soon lose its value and force investors to look elsewhere.

Conclusion

What is your feeling towards GBTC Stock? Will you invest it or look elsewhere? That decision rests with you. GBTC, just like stocks, is unpredictable. If it consistently rises, it may be good to invest in it. However, it is hard to predict what will happen the following day. It could suddenly decline, as we saw in our previous illustrations. However, most investing problems will be tackled if the management converts the crypto into an ETF. ETFs are less volatile, precisely what every investor hopes for when purchasing a particular cryptocurrency. Since there are talks on this, there is no harm in investing in it. If you already invested in crypto and the company made that move, your funds will not be affected.

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