(Bloomberg) -- Bitcoin’s awe-inspiring surge to record highs has investors racing for exposure to the rally -- even if it means paying an absurdly high markup.
As the largest cryptocurrency rocketed above $23,000 for the first time this week, the mania pushed the price of the Bitwise 10 Crypto Index Fund (ticker BITW) as much as 650% above the value of its holdings and is currently trading near 350%, according to data compiled by Bloomberg. Meanwhile, the premium on the Grayscale Bitcoin Trust (ticker GBTC) swelled to 34% amid the rally.
Such dislocations mean that large institutional investors and mom-and-pop traders alike have to pay up massively to purchase shares, versus buying the underlying holdings outright. But as Bitcoin’s 200% year-to-date rally attracts feverish attention and stokes fears of further missing out on the gains, demand for anything with a crypto wrapper is booming. For those investors looking for access to Bitcoin but who are reluctant or unsure how to get direct exposure, the ease of buying products like BITW or GBTC through a brokerage platform trumps the extra cost.
“The answer isn’t as simple as ‘does it make sense to pay for that?’ in a vacuum. It makes absolutely no sense to pay that premium,” said James Seyffart, a Bloomberg Intelligence ETF analyst. “But I think some level of premium is justified, and if you want access to Bitcoin, there really aren’t better options.”
BITW has soared 165% since its debut earlier this month, far outpacing the gains in Bitcoin and Ether. GBTC has climbed roughly 40% over that time period. That outperformance creates the gap between the products’ prices and the net asset value of their underlying holdings.
Those dislocations occasionally appear in the $5 trillion exchange-traded fund universe -- particularly in periods of heightened volatility, as in March -- but rarely surpass 3% or so. When they do, specialized traders known as authorized participants step in to arbitrage the gap away by creating or redeeming shares of the ETF.
However, given that the Securities and Exchange Commission hasn’t yet approved the ETF format for cryptocurrencies, no such intermediaries exist for the Bitwise and Grayscale products. Neither vehicle allows for redemptions, meaning that a fixed number of shares are issued, though secondary offerings are allowed by GBTC for institutional investors who contribute Bitcoin. Even so, that can create staggering discounts or premiums when supply and demand imbalances arise.
Companies that dabble in crypto-related industries have served as a proxy for exposure since the Bitcoin bubble of 2017. Investors took that to a new extreme when business-intelligence firm MicroStrategy Inc. moved its treasury holdings into the cryptocurrency in August, prompting its shares to more than double.
The premiums showcase “overwhelming investor demand to obtain Bitcoin exposure through means other than direct ownership or via crypto exchanges,” said Nate Geraci, president of the ETF Store, an investment advisory firm. “It’s absolutely mind-boggling that regulators allow retail investors to access these products, but won’t allow a Bitcoin ETF which would easily solve the premium issue.”
A rough back-of-the-envelope calculation suggests that at a 34% premium, investors are paying the equivalent of $30,522 if Bitcoin’s price is $22,800 per coin. At BITW’s 358% premium -- which doesn’t just hold Bitcoin -- that sum balloons to $104,424.
But still, for investors looking for crypto exposure in retirement accounts or other portfolios, buying shares of BITW or GBTC is likely seen as the easiest way outside of using a digital-asset trading platform, according to Seyffart.
“If you want Bitcoin in your existing brokerage IRA, the simplest way is through GBTC,” Seyffart said. “That’s not to say advisors can’t learn how to use crypto apps or Cash App, but if you want to get Bitcoin in existing legacy financial systems -- where almost all the money is -- you need something that works in that system.”
©2020 Bloomberg L.P.