Bitcoin has been having a tough time of late. Values have tumbled from above the $65,000 mark to under the $20,000 level. So, is crypto stock market play Grayscale Bitcoin Trust (GBTC) a good buy now? Let's examine GBTC stock to find out.
XGold 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 a similar alternative during the coronavirus crisis. But with financial reality now hitting home, and the broader stock market itself currently in the grip of a correction, recent times have been tough for the digital currency.
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 Bitcoin performance based on investor sentiment.
GBTC Stock: It's Not A Stock
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.
ETF Bid Fails (For Now)
Back in June, the SEC rejected Grayscale's attempt to turn the trust into an exchange-traded fund (ETF).
Regulators say investors are vulnerable to fraud and manipulation as the SEC does not have oversight over cryptocurrency-trading venues not registered as exchanges in the U.S. This is because they have no insight where Bitcoins are coming from.
The company is suing the SEC. The firm's CEO Michael Sonnenshein said the SEC is failing to apply consistent treatment to bitcoin investment vehicles.
The Grayscale Bitcoin Trust is currently trading for a substantial discount on its underlying bitcoin holdings.
Grayscale claims that converting GBTC into an ETF will likely help bring its share price to trade in line with its underlying value.
Grayscale Bitcoin Trust Technical Analysis
The GBTC stock price generally moves in line with the price of Bitcoin.
GBTC has been given a spanking amid the digital currency's latest woes, falling 67% so far this year. This means it is being spanked by the S&P 500 even though it has fallen almost 24% so far in 2022.
Its last breakout came in October 2020 and it has now given back all its gains and more from a 14.88 entry, according to MarketSmith analysis.
The relative strength line has resembled a ski-slope since the start of April, though its declines have been less severe since July. This gauge reflects a stock's performance vs. the S&P 500.
It is in the bottom 10% of stocks in terms of price performance over the past 12 months.
The price of Bitcoin itself fluctuates wildly, and its performance underlines the opportunity and risks of the cryptocurrency.
Bitcoin hit a record high around the $65,000 mark on November, according to CoinDesk. But it has been plunging as investors retreat from risky assets. It is currently trading just below the $19,000 level.
The fact that Bitcoin frequently spikes before suffering brutal reversals underscores the volatility of the digital currency. Those who got in at the wrong time are nursing painful losses.
GBTC's Big Bitcoin Hoard
In its annual report, GBTC said its assets increased to $20.2 billion as of Dec. 31, 2021. At the end of the year it had a net closing balance of 644,809.96863835 Bitcoins.
According to GBTC, its total assets under management, as of September, were $12 billion. It also states that the fund has fallen by about 56% over the past 12 months.
Is Bitcoin Digital Gold?
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 year 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.
Is Owning Grayscale Bitcoin Trust The Same As Owning Bitcoin?
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, the trust 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 — and often paying high trading fees.
Is GBTC Stock A Good Buy?
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.
GBTC stock is badly lagging the S&P 500 this year. The benchmark index is hardly a stellar performer itself but has suffered a less painful drawdown. Bitcoin bulls may see some appeal, but it takes a lot of stomach to hold through the massive volatility. Many investors are already massively underwater.
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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