Each share of Bitcoin Investment Trust (NASDAQOTH:GBTC) represents ownership of approximately 0.092 bitcoin. Therefore, in functioning markets, the trust should trade for a price that roughly corresponds to the market price of 0.092 bitcoin.
The key word here is “should.” As we’ve seen, Bitcoin Investment Trust is a poor proxy for bitcoin because it typically trades at a premium to the value of the bitcoin it owns. Often, it rises in price when bitcoin falls, and falls when bitcoin rises, because of changes in the premium.
Andrew Left is a noted short seller who has taken aim at the irrational price at which the trust trades. In a recent tirade on Twitter, he estimated that Bitcoin Investment Trust was trading at 80% more than its bitcoins were worth. At the same time, bitcoin futures traded at a mere 10% premium to spot bitcoin prices, according to his calculations.
Left provided his view on the stock in under 280 characters:
Citron would not be pounding table if not appropriate. Now with the launch of CME futures, BTC positions can be hedged for 10% premium of spot while $GBTC is trading at 80%. Who cares where bitcoin goes..thank you for the 70% profit. Shorting More $GBTC and buying futures
His tweet proved ill-timed, as the premium expanded further throughout the trading day, closing at roughly 101% more than the value of its underlying bitcoin. But even if he was wrong for the day, it’s my view he’s right: Shorting Bitcoin Investment Trust when it trades for high premiums can be very profitable if done correctly.
Shorting the premium, not the bitcoin
Left’s trade is relatively simple. By shorting Bitcoin Investment Trust and buying bitcoin futures, whether bitcoin goes up or down in value is mostly moot. What matters is whether Bitcoin Investment Trust’s premium falls at a faster rate than the premium on the futures.
Shorting Bitcoin Investment Trust when it trades at a high premium to net asset value has historically been a very good trade, provided you can hedge out the risk that bitcoin surges in value and takes the trust along for the ride. One might hedge out the price of bitcoin by buying bitcoin from an online exchange, or by buying bitcoin futures contracts. No matter how you do it, the fact remains that premiums above 80% are rare and haven’t lasted very long.
The chart shows the distribution of Bitcoin Investment Trust’s premium over its entire history as an over-the-counter stock. Over this period that spans 667 trading days, Bitcoin Investment Trust closed at a premium of 80% or more on fewer than 12% of trading days. When the premium rises above 100%, it’s an even safer short. Triple-digit premiums have occurred on less than 3.2% of market closes, or less than one trading day per month, on average.
Trades like Left’s are arguably easier and safer than they have ever been. Thanks to bitcoin futures, one can short Bitcoin Investment Trust and go long bitcoin with futures through the same account, reducing the risk of getting closed out of the short position at an inopportune time because of a margin call. Previously, these trades had to be separated by shorting Bitcoin Investment Trust in a brokerage account, and going long bitcoin on an exchange like Coinbase or GDAX.
As futures become available at more retail brokerages, I suspect that Bitcoin Investment Trust will close at lower and lower premiums to its net asset value. At first, Interactive Brokers was the only retail brokerage that offered bitcoin futures, but TD Ameritrade has since joined the ranks of brokers supporting CBOE bitcoin futures for retail traders. At the margin, traders who have no choice but to buy Bitcoin Investment Trust at sky-high premiums are likely to turn to bitcoin futures, because futures prices have more closely followed spot bitcoin prices.
On its own, TD Ameritrade’s decision to open up futures to retail accounts could have a pronounced impact on Bitcoin Investment Trust’s premium. The broker’s website lists stocks in rank of order of which its clients look up most frequently. The top stock on the list? Bitcoin Investment Trust.
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