Bitcoin and GBTC

There has been a lot of clamor about this stock since bitcoin begun its atmospheric rise in the last few months. I’ve been casually following bitcoin for the last 2 years and wasn’t convinced to join the gold rush. But when the big news came that the SEC rejected the first bitcoin ETF few months ago, I knew bitcoin has breach the tipping point.

The first thing I did was to call my broker and ask for a list of bitcoin stocks that I can potentially invest in (for the average Joe or Jane who are risk averse, bitcoin exchanges like coinbase, kraken and poloniex isn’t an option). To my surprise (more of disappointment actually), he told me there is none. Unsatisfied, I turned to Google and eventually found GBTC.

But is it a good investment or a highway robbery?

Let’s start with some key facts.

GBTC is a bitcoin investment trust owned by Grayscale – a digital currency group company. It has a total outstanding stock of 1,868, 700. The equivalent bitcoin per share is 0.09242821. On September 1, 2017, its stock price per share was $800 (you can verify these facts at this link: https://grayscale.co/bitcoin-investment-trust/ and https://finance.yahoo.com/quote/GBTC?p=GBTC for the stock price).

Using the above facts, we can deduce the following:

• As of 9/1/2017, Grayscale has a market value of $1.5 billion (1,868,700 x 800);
• It owns a total of 172,720 (1,868,700 x 0.09242821) bitcoins;
• At the current bitcoin price of $4,630 per coin, the value of the underlying bitcoin assets is $799,693,600 (172,720 x 4,630);
• In other words, GBTC is “overpriced” by $701 million ($1.5B – $799M) or a premium of 87% above its underlying bitcoin assets.

Is 87% premium bad?

To start with, a premium is the “value added” to the underlying asset of a company by its investors. Good companies demand a premium. Just like organic foods, people are willing to pay more for the perceived health benefits over non-organic. This added value is driven by a myriad of factors some of which are speculative.

Let’s looks at few examples of famous companies:

APPLE: At its current stock price of $164 per share and with 5.165B outstanding stocks (as of 7/21/2017), it is valued at $847 billion (164 x 5.165B). Its underlying assets is $345 billion (as of 7/1/2017) or a premium of 145%.

FACEBOOK: Current stock price of $172 per share with 2.904 B outstanding stocks (as of 7/24/2017). Total market value is $499 billion (172 x 2.904B). Its underlying assets is $74 billion (as of 7/1/2017) or a premium of 574%.

TESLA: Current stock price of $355 per share with 166.89 million outstanding stocks (as of 7/31/2017). Total market value is $59 billion (355 x 166.89 million). Its underlying assets is $26 billion (as of 7/1/2017) or a premium of 127%.

As you can see, premium and stock price are like butter and bread. They are inseparable. The question then is how much premium is too much for GBTC? I understand this is not a straightforward question but I think it boils down to this:

What would be the price of one bitcoin in 2, 5 or even 10 years from now?

If your answer is north of $10,000, then GBTC is a good investment. Otherwise, avoid it like a plague.

PS: There are as many ways of calculating a company’s premium as there are investors. The above calculation is just one of them. WARREN BUFFET uses the following formula to calculate a company’s “intrinsic value”: Latest Annual Earnings x [8.5 + (2 x average annual earnings %age)].