It turns out that convenience comes at a high price.
Exchange-traded funds (ETFs) — groups of individual stocks that trade under a single ticker symbol — are meant to simplify investing. A few ETFs can help you diversify your investments in minutes, whereas sifting through dozens of individual companies to park your money in can be a time-consuming process.
In cryptocurrency, Grayscale Bitcoin Trust ETF (GBTC 0.57%) Owning it can take a lot of work. Bitcoin (BTC 0.47%).
But what's the point of owning not just Bitcoin but a Bitcoin ETF? Cryptocurrency has proven that it can make investors millionaires. Can this ETF do the same?
Here's what you need to know:
What is the Grayscale Bitcoin Trust ETF?
On the surface, it's a simple investment: Grayscale Bitcoin Trust is an ETF that holds Bitcoin, and buying shares gives investors indirect exposure to the cryptocurrency's price fluctuations.
Why wouldn't someone hold Bitcoin directly instead? Well, that could be difficult to do – for example, it would put security responsibility on the holder. Cryptocurrency can be stored on an exchange or in physical (cold) storage, each of which has its pros and cons.
Let's say you lose access to your wallet or the exchange you're using experiences issues like disgraced cryptocurrency exchange FTX Grayscale ETFs use cold storage (stored on offline servers through a company called Coinbase Custody Trust) to protect the Bitcoin represented by their shares, so it's a safe and convenient way to profit from your cryptocurrency investments without the obligation to own and manage the cryptocurrency yourself.
Several factors affect the value of Grayscale Bitcoin Trust. The fund charges a 1.5% annual fee for managing your cryptocurrencies, but you won't have to pay this fee if you instead manage your cryptocurrencies yourself. Additionally, an ETF may trade at a premium or discount to its underlying Bitcoin value at any time.
Investors should consider how the ETF is trading against the price of Bitcoin before deciding whether to buy shares. This can be done by comparing the ETF's share price to its net asset value per share.
Bitcoin's Incredible Return on Investment
A quick look at Bitcoin's success over the years makes it clear why investors would consider adding Grayscale ETFs to their portfolios. As an asset, the digital coin has significantly outperformed the overall stock market over the past decade.
Bitcoin price data by YCharts.
The theory of investing in Bitcoin is simple and straightforward. The supply of fiat currencies continues to expand at a much faster pace than Bitcoin. As the value of the US dollar decreases (due to inflation), the price of cryptocurrencies has increased over time. Because of the halving that occurs every four years, the supply increases slowly over time, and as people's demand for investing in and using Bitcoin increases, the supply becomes more limited.
Therefore, the price of a token is ultimately determined by supply and demand. Investors' expectation is that as supply increases at an unprecedented pace, demand will increase indefinitely.
Can ETFs make you a millionaire?
The million dollar question is whether investors will pay for the convenience this ETF provides. How much does it cost? In fact, it costs a lot.
Below, you can see that the ETF has significantly underperformed Bitcoin itself over time. These management fees can prove to be very expensive in the long run.
GBTC data by YCharts.
But that being said, the fund still far outperformed the overall stock market, and the Grayscale Bitcoin Trust ETF clearly has strong long-term investment potential, as the crypto investment thesis continues to play out. If it continues, it definitely has the potential to create millionaires. Year.
Justin Pope has no position in any stocks mentioned. The Motley Fool has a position in and recommends Bitcoin. The Motley Fool has a disclosure policy.
