Bitcoin, like the stock market itself, rallied strongly after hitting lows during the coronavirus pandemic. And after a sharp recent pullback, the digital currency has now rallied again to new highs.
So is GBTC stock a buy right now? Let’s take a look at what Grayscale Bitcoin Trust (GBTC) is and how it’s performing.
Gold has traditionally been the asset class investors have fled to in times of uncertainty. There was hope among cryptocurrency enthusiasts that Bitcoin would serve as an alternative during the coronavirus crisis. With a number of notable big business names getting involved in the space, such as Elon Musk’s Tesla (TSLA), acceptance is becoming more widespread.
One hurdle is that investors have limited options to get exposure to the digital asset via the stock market. One possibility is Grayscale Bitcoin Trust, which owns and tracks Bitcoin.
More specifically, Grayscale Bitcoin Trust tracks the Bitcoin price based on the TradeBlock XBX Index. But while the trust closely mirrors the performance of Bitcoin, the GBTC stock price tends to over- or undershoot performance based on investor sentiment.
One key thing to remember when considering buying shares in Grayscale Bitcoin Trust is that it’s not a true common stock. Stocks are shares in a company, while GBTC shareholders own part of an open-ended grantor trust.
Grantor trusts are required to hold a fixed portfolio, rather than a variable one. Such trusts often hold physical commodities and currencies. In this case, GBTC is a trust that only holds Bitcoin. Bear in mind that the Investment Company Act of 1940 does not cover grantor trusts, so they provide none of those investor protections. They also do not qualify for regulation by the Commodity Futures Trading Commission.
However, grantor trusts are covered by the Securities Act of 1933 and the Securities Exchange Act of 1934, and must disclose regular financial information.
Previously it broke out of a cup-without-handle base on Oct. 22. The ideal entry point here was 14.88.
The recent action underlines the volatility of GBTC stock and Bitcoin itself. It fell by more than 40% during its recent correction at the end of January.
The relative strength line has spiked again to a new all time high. It has been rallying strongly after a sharp January pullback. This gauge reflects a stock’s performance vs. the S&P 500.
The price of Bitcoin itself fluctuates wildly, and its performance underlines the opportunity and risks of the cryptocurrency.
It is now eyeing the $50,000 milestone after surging to a record high of just over $48,000.
Bitcoin has recovered well since falling away from its previous record high of almost $42,000. However the fact it lost 28% as it tumbled from this mark underlines the volatility of the digital asset.
Tesla (TSLA) helped boost the price of Bitcoin to a record high after revealing a $1.5 billion investment in Bitcoin on Feb. 8.
It came just weeks after the firm’s billionaire CEO Elon Musk added a Bitcoin hashtag to his Twitter biography.
Tesla has also said it will start accepting Bitcoin as a payment method. However it warned this will be “subject to applicable laws and initially on a limited basis.”
The move led to the price of the cryptocurrency spiking to a record high. It has also sparked speculation over whether other major companies will follow Tesla’s lead.
Janet Yellen, the new Treasury Secretary, struck a skeptical tone on cryptocurrencies such as Bitcoin during her testimony to the Senate Finance Committee.
“I think it important we consider the benefits of cryptocurrencies and other digital assets, and the potential they have to improve the efficiency of the financial system,” she said. “At the same time, we know they can be used to finance terrorism, facilitate money laundering, and support malign activities that threaten U.S. national security interests and the integrity of the U.S. and international financial systems.”
However she also said cryptocurrencies offer “potential benefits for the U.S., and our allies.” The former Federal Reserve chairwoman also said it is important to look into ways to “encourage their use for legitimate activities while curtailing their use for malign and illegal activities.”
Nevertheless, the price of Bitcoin retreated sharply on her remarks, and it seems she will play a key role in its progress going forward. The fact she has previously said she is “not a fan” of Bitcoin may not bode well.
Grayscale Bitcoin Trust said in its latest report it experienced $719.3 million in inflows in the third quarter. In addition, it saw under management swell from $1.9 billion to an estimated $4.7 billion in 2020.
According to the Trust, institutional investors made up the bulk of its holders, 84% of the total. The number of overseas investors has also been increasing, rising to 60%, compared with 55% over the trailing 12 months.
One big name backing Bitcoin is hedge fund billionaire Paul Tudor Jones, who is most famous for raking it in during the Black Monday stock market crash of 1987. The Tudor Investment Corporation founder believes the Bitcoin rally is still in the “first inning.” He sees the digital currency as the best inflation hedge.
He cited the Federal Reserve’s unprecedented quantitative easing as a reason for investors to look for protection in case of inflation.
“The reason I recommended Bitcoin is because it was one of the menu of inflation trades like gold, like TIPS break-evens, like copper, like being long (on the) yield curve; and I came to the conclusion that Bitcoin was going to be the best inflation trade,” he told CNBC.
A number of heavy hitters have been snapping up Bitcoin of late. Business intelligence firm MicroStrategy (MSTR) announced Sept. 15 that it had bought $250 million in Bitcoin. Square (SQ) disclosed in early October a more modest $50 million investment in the Bitcoin market. As bigger buyers have bought more Bitcoin, the supply has been drying up. This pushes up its price.
Another factor that previously gave the price of Bitcoin a boost is that <b class="css-14iz86j-BoldText e5tfeyi0">PayPal (PYPL) entered the cryptocurrency market in October. Customers can now buy and sell Bitcoin and other virtual currencies using their PayPal accounts.
The likes of Square’s Cash app and Revolut had already offered such a service, but are much smaller than PayPal.
Virtual coins are also used to make purchases from the 26 million sellers that accept PayPal. The payments firm has been rolling out buying options in the U.S. and is aiming to carry out a full rollout early in 2021.
When purchases are made, PayPal will convert the cryptocurrency into the relevant national currency. This means merchants will never actually be paid in crypto coins.
Bitcoin is sometimes called “digital gold,” enhancing the risk-adjusted returns of traditional investment portfolios.
One key difference between gold and Bitcoin is the former is actually a physical asset, and has a number of uses besides being a commodity of exchange. For example, almost 80% of gold consumed each years is made into jewelry. It is also a highly efficient conductor that is able to carry tiny electrical charges.
Gold is often a hedge against inflation or other economic or market uncertainty. Gold prices have hit record highs, briefly hitting $2,000 an ounce recently. Silver prices also have spiked to multiyear highs. They’ve retreated from early August peaks.
Meanwhile, Bitcoin and related instruments like GBTC have not been a store of value during the coronavirus crisis.
While GBTC is a trust that only holds Bitcoin, the GBTC stock price does not exactly match the underlying Bitcoin price. Depending on investor sentiment, its shares can trade at a premium to its assets, or at a discount to its total Bitcoin holdings.
However it is the fastest way stock market investors can get cryptocurrency exposure without actually buying their own Bitcoin. This is because regulators have not approved a Bitcoin ETF. And buying Bitcoin directly requires setting up and funding a separate account, often paying high trading fees.
Grayscale Bitcoin Trust, like the underlying Bitcoin, is prone to wild swings. Ultimately, it’s a bet on Bitcoin, which is a speculative asset more than a real currency. Increasing institutional investment makes it an asset worth watching, but recent price swings underline its volatile nature.
GBTC stock posted gains far in excess of the S&P 500’s in 2020. However it is now well above its most recent actionable entry point. Those looking to invest in the cryptocurrency would be best served waiting for a new buy point to emerge.
Given the asset’s history of wild declines however, those who buy in now could be ultimately left nursing painful losses.
Bottom line: GBTC is not a good buy right now.
Most investors would be better served studying the stock market, and compiling a watchlist of profitable companies setting up in proper bases, when looking for stocks to buy.
To find the best stocks to buy or watch, check out IBD Stock Lists such as the IBD Leaderboard.
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