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Better Buy: Bitcoin vs. Grayscale Bitcoin Trust?

Motley Fool - Sat Apr 9, 6:07AM CDT

Is the Grayscale Bitcoin Trust(OTC: GBTC) a better investment than simply buying Bitcoin(CRYPTO: BTC)?

At first glance, it doesn't seem to matter which way you go. A closer inspection, however, points to a clear winner in this cryptocurrency duel. Let's have a look.

What's the difference?

Bitcoin is Bitcoin -- the first, largest, and most famous of all cryptocurrencies. It's a digital ledger of transactions, heavily encrypted to ensure the security and stability of each transaction and managed by a global blockchain system across thousands of computers.

The Bitcoin system was originally designed as a decentralized payment system, spanning national borders and huge distances with low transaction fees and fast execution. These advantages are measured against traditional cash and credit systems, which add significant costs and often hours or days of processing time when the transaction is international.

It is also meant to provide a system of stable long-term value storage. There will never be more than 21 million Bitcoins on the market due to hard limits in the underlying mining code. It would take a rewrite of Bitcoin's code to exceed that limit, and the decentralized nature of the Bitcoin community makes this idea very unlikely. It would undermine the value of each Bitcoin and the system as a whole, and I don't see why Bitcoin miners and developers would allow it to happen.

So that's Bitcoin in a nutshell -- an ultra-secure transaction system managed by a global community.

A Bitcoin logo in the form of a silver statue, placed on top of a large red question mark.

Image source: Getty Images.

The Grayscale Bitcoin Trust is a different beast. This investment vehicle is managed like a stock-based trust fund and presented to investors in the form of stock on the OTC market. The trust invests directly in Bitcoin and has no other holdings. This setup is subject to rules and regulations that don't necessarily apply to the bare Bitcoin asset, which allows investors who crave or require regulated securities to invest in Bitcoin through this channel.

There's a downside to the Grayscale Bitcoin Trust, though. The additional checks and balances of this structure come at a cost, and the Grayscale firm charges an annual management fee of 2%. The amount of Bitcoin under the trust's management is not fixed. The trust held 641,391 Bitcoins in April 2021. Today, the holdings stand at 653,919 Bitcoins. That's a 2% reduction in 12 months, consistent with the stated 2% management fee.

How does that difference affect investor returns?

As a result, the trust tends to lag behind the basic Bitcoin price chart over an extended period. Here's how the two investments compare over the last three years, for example. The S&P 500(SNPINDEX: ^GSPC) stock market index is also included here so you can see how the crypto investments compare to Wall Street's typical returns:

Bitcoin Price Chart

Bitcoin Price data by YCharts.

It's important to note that the Grayscale Trust's share prices are not tied to a specific fraction of a Bitcoin. If so, the chart lines should have remained no more than 6% apart over the three-year period shown above. Instead, share prices are determined by the free market.

The price-setting process includes considerations such as the Grayscale vehicle's added security, fee structures, management risks, and more. In particular, it looks like investors are placing less value on the trust's management features as the cryptocurrency market approaches a proper regulatory framework of its own. The spread between Bitcoin prices and the Bitcoin-based trust grows every time a cryptocurrency regulation bill makes the rounds in Congress.

Who should own Grayscale Bitcoin Trust shares?

The Grayscale Bitcoin Trust still serves a useful purpose for some investors, but it is not a drop-in replacement for owning Bitcoin directly. At the end of the day, the trust becomes less useful and valuable as the crypto market gets healthier and more stable.

That's an unfortunate equation, which works in Grayscale investors' favor only if the progress toward reasonable legislation slows down or hits a brick wall. It's a Bitcoin-based asset for investors who expect the crypto market to run into legislative trouble. And if that's your view, maybe you're better off staying out of the cryptocurrency sector until the legal and regulatory wrinkles have been ironed out.

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Anders Bylund owns Bitcoin. The Motley Fool owns and recommends Bitcoin. The Motley Fool has a disclosure policy.