Bitcoin Fund in Retirement Accounts Bettors Pay the Price

By CoinUnited.io Research Team

30 Jan 2023

2 min read

Grayscale Bitcoin Trust has been utilized by individual investors to hedge their retirement funds against price fluctuations in bitcoin for a long time.

The $14.6 billion trust, which traded under the ticker GBTC, was one of the few ways for retail investors to gain exposure to bitcoin without actually buying the cryptocurrency.

Shares of GBTC can be traded on the open market, but investors cannot redeem their shares for bitcoin. This might cause the fund's shares to trade at a premium or discount to the value of the bitcoin it owns.

By 2020, the fund was trading at a 10% premium when George Bodine, a 66-year-old retired airline captain from Covington, Kentucky, purchased GBTC shares for his retirement account. Around the same time, bitcoin and other forms of high-asset investing were seeing significant growth. In part because of Canada's debut of a spot bitcoin ETF, the premium changed to a discount in February 2021.

When compared to bitcoin's pricing on Thursday (about $23,000), GBTC traded at a discount of 42%.

According to Mr. Bodine, if he sold his shares today he would recover 50% of his initial investment. Mr. Bodine is still responsible for the hefty 2% yearly charge even though he has not seen any growth in the value of his investment despite his continued participation in the fund.

Mr. Bodine expressed concern that GBTC had become "Hotel California." You're free to go at any time, yet there's no leaving. Executive Director of Digital Currency Group Barry Silbert introduced GBTC in 2013 with the same characteristics as an ETF, allowing for the creation and redemption of shares of the fund concurrently to meet fluctuating demand.

Because of its status as an exchange-traded fund (ETF), GBTC would be subject to creation and redemption orders from market makers known as authorized participants to guarantee that its share price accurately reflects the value of the bitcoin it stores.

One proponent of transforming GBTC into an ETF is Tim Hooker, co-founder of Dynamic Wealth Solutions in Southfield, Michigan. His registered investment advice business handles $58 million in client assets and holds around $266,000 worth of GBTC shares across 22 accounts.

Mr. Hooker, 32 years old, claims he bought these GBTC shares to satisfy the 2019 bitcoin investment needs of his clients. At the time, he added, the fund was trading at a premium of 15% to 20% above NAV.

When asked what he advised clients, he reportedly stated, "It's not the greatest one, but if it does convert to an ETF, cross our fingers, you may earn a fast 40%." This was in reference to the possibility that the GBTC discount would be closed upon the ETF conversion.

He only recommends putting 3% of a client's fund into GBTC and only if they have a high risk tolerance, thus he only buys shares for those clients.

Grayscale's Mr. Sonnenshein has stated that the company will consider a tender offer for up to 20% of the fund's shares outstanding if GBTC is unable to convert the trust into an ETF.

In 2020, 28-year-old San Francisco software company founder Daniel Sangyoon Kim invested five figures in GBTC shares through his Individual Retirement Account. He claims to have lost over $10,000 since he sold them all at a loss when the FTX crypto exchange went bankrupt in November.

Former employee of venture financier Tim Draper's firm, Mr. Kim expressed worry about Grayscale's sibling company, crypto lender Genesis Global Capital, due to financial difficulties there.

In doing so, crypto exchange Gemini's "earn" program froze around $900 million in retail cash owed to Genesis. According to Genesis' bankruptcy complaint, on the same day that it suspended withdrawals, Gemini sold approximately 30 million GBTC shares to a private bidder at a discount. Crypto investors and analysts agree that the transaction was a significant factor in bringing the discount rate for GBTC to a new all-time low of 50% in December.

The past year has been filled with tragedy, Mr. Kim added. In the user agreement, FTX makes it clear that they will not interfere with the security of users' funds. He assured us that Genesis "does not affect the functioning of any of our goods."

After receiving security from Coinbase Custody, where Grayscale maintains its bitcoin, that its digital assets are in safe hands, Mr. Kim stated his willingness to repurchase certain GBTC shares.

Unfortunately, he can no longer make the investment through his Vanguard IRA. According to its website, Vanguard stopped allowing its clients to buy GBTC and other OTC securities in April 2022.

"I still hold a lot of bitcoin," Mr. Kim emphasized.

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