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Better Buy: Bitcoin Investment Trust vs. Bitcoin (BTC)

Bitcoin (BTC-USD), the largest cryptocurrency in the world by market cap, has delivered dismal returns for investors over the past year or so. Since peaking at nearly $20,000 in December 2017, bitcoin has lost more than 82% of its value.

However, there's still a valid long-term investment case to be made. There are still experts who believe that bitcoin will be adopted as a currency on a wide-scale, and others say that it could become a widely used store of value, similar to gold. As I wrote in a 2017 article, bitcoin could rise dramatically in price even if its value eventually became equal to just a few percent of the world's money supply. While I don't think it's particularly likely, it's entirely possible for bitcoin to rise to a six-figure value at some point.

Image source: Getty Images.

Obviously, this is a simplified version of the bitcoin investment case. However, whatever your reasoning for wanting to buy it, bitcoin is a highly speculative investment. I wouldn't suggest using any money to buy bitcoin or any bitcoin-based investments like the Bitcoin Investment Trust that I'm about to discuss, unless you're prepared to lose it.

That said, there are a couple of main ways you can add bitcoin to your investment portfolio. Obviously, you can buy and own bitcoin tokens directly through an exchange like Coinbase, or you can invest indirectly by buying shares of a company that owns bitcoins, such as the Bitcoin Investment Trust (NASDAQOTH: GBTC).

What is the bitcoin investment trust?

As of early 2019, the Securities and Exchange Commission has yet to approve a single bitcoin ETF. So, people who want to own bitcoin, but don't want to directly purchase the cryptocurrency, are rather limited in their options.

In fact, the closest thing to a bitcoin ETF in the market is the Bitcoin Investment Trust. It's a company (not an ETF) that owns bitcoins, and shares of the company are traded on the public market. In other words, the shareholders of the Bitcoin Investment Trust effectively own the company's bitcoins, as they make up virtually all of its assets.

There are two main downsides to investing in the Bitcoin Investment Trust as opposed to simply buying bitcoin directly. First is the ongoing management fee. The Greyscale Investment Trust, which operates the Bitcoin Investment Trust, charges a 2% annual management fee. This is high by anyone's mutual fund or ETF standards and means that investors will slowly "own" fewer bitcoins over time.

Second, and even more significantly, shares of the Bitcoin Investment Trust trade at a huge premium to the value of the bitcoins they represent. As of the latest available information, each share of the company represents ownership of 0.00099063 bitcoin. While the price of bitcoin (and the Bitcoin Investment Trust) obviously fluctuates over time, here's how the math works out at the exact moment I'm writing this: The Bitcoin Investment Trust trades for $4.20 per share. Bitcoin tokens trade for $3,588. Multiplying by the factor in the last paragraph shows an asset value for the Bitcoin Investment Trust of approximately $3.55. So, shares trade at a hefty 18% premium over the value of bitcoin they represent.

The verdict

To be clear, I'm not a big fan of cryptocurrencies as an investment vehicle. The industry is simply too young, and I'd compare investing in a particular cryptocurrency to investing in a tech start-up in the late 1990s -- sure, there's a chance that some of them will make it, but the vast majority of cryptocurrencies on the market are likely heading to zero. And don't think that bitcoin will automatically come out on top because of its first-mover advantage and the fact that it's the largest one. It certainly has a better chance of success than most, but it's far from a sure thing.

Cryptocurrencies and blockchain technology certainly have lots of potential to transform industries (not just the way we use money), so my preferred way to invest is to own stocks of companies with rock-solid businesses that also stand to benefit from the long-term evolution of these technologies.

Having said that, if you're determined to buy one of these, I'd say that owning bitcoin directly is the better idea. Purchasing bitcoin on an exchange, such as Coinbase, has become far more user-friendly and secure in recent years, so you might as well save yourself the premium and fees of the Bitcoin Investment Trust.

Bitcoin is overhyped: 10 better buys for you now
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Matthew Frankel, CFP has no position in any of the stocks or cryptocurrencies mentioned. The Motley Fool has no position in any of the stocks or cryptocurrencies mentioned. The Motley Fool has a disclosure policy.

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