The big paradox: Is the Grayscale Bitcoin Trust really Bitcoin?

Many dogmatists argue and fight about the true meaning of these investors in the industry. How should we evaluate the case?

The price of Bitcoin is going up right now, because there are more buyers than sellers.

It’s as simple as that. Of course, the buyer always buys in optimism. That is, he buys today, because he thinks the price will go up in the future and he will make a profit. We would like to think, of course, that our assumptions about tomorrow are objective. However, in most cases, they are emotional bets motivated by the mood in the room. What we call „institutional capital“ is nothing more than a group of people who meet all the time at conferences and cocktail parties.

What is the Grayscale Bitcoin Trust, and why is it in vogue?

The most important fund managers are well-known names. They usually all frequent the same clubs and eat at the same places. They compete for customers. But they often collaborate with each other when it’s convenient. The big goal of any fund is to beat the S&P 500 every year. It’s not always easy. But they have to do it in order to justify their high commissions. The world of hedge funds is not an easy world. The pressure is immense. Because the numbers must always reflect the promised success. Otherwise, the truckers‘ union, the accountants‘ college, the municipality, or the millionaire widow can take your money and start working with another fund that gets better results.

The Bitcoin Identity Crisis – Asset or Currency?

Passive funds are less stressful. These funds don’t promise anything. They simply put the money into a pre-established list of companies and that’s it. These are the famous index funds. The best known are Blackrock and Vanguard. These titans are in everything, because that’s precisely what they promise. That is, a piece of the S&P 500 or the Dow Jones. The great advantage of these funds is the low commissions. Hedge funds are controversial in this regard, because profits tend to be quite reduced due to high commissions. So, in many cases, it is better for the investor to invest in an index fund directly and save himself the complication.

This logic marked the success of John Bogle, the founder of the Vanguard Group.

The Grayscale Bitcoin Trust is a fund, created by Barry Silbert, that basically works as an ETF, but is not an EFT. That is, all it does is hold Bitcoin, but the fund as such is a figure in the stock market. So, traditional investors can simply call their broker and ask them to buy Grayscale Bitcoin Trust (GBTC) instead of buying Bitcoin directly. This way, they get the best of both worlds.

The advantages of Grayscale are manifold. First, it’s extremely easy to buy large quantities. On the other hand, the investor doesn’t have to worry about regulatory, tax or custody issues. In other words, all the hassles of private keys, hacking, or legal ambiguity are no longer an obstacle to investing in Bitcoin in a big way.

These are very relevant issues for the institutional investor. We must remember that when we talk about institutional capital we are really talking about other people’s money. In most cases, these funds are funds of funds. For example, the humble nurse is a member of the nurses‘ union. The leaders of this union are always fighting for a better collective bargaining agreement, but at the same time they charge a monthly fee to their members. In many cases, these organizations provide multiple services such as insurance, retirement, etc.

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However, these funds are usually managed by a third party, because the union board usually does not want to carry such a burden. So they usually go to one of these fund managers. But we must remember that it is not easy to run a union. There is always the political rival, the jealous colleague, or the disgruntled member who is always looking for the five legs of the cat to discredit the current board. Not to mention that the authorities are always watching their every move for irregularities or acts of corruption. That means having Bitcoin in a cold wallet under the mattress is a big no in this case. Sorry, puritans, but that would be extremely irresponsible.

What we have now is a big triangulation. The funds put their money into a mutual fund and the funds are in turn putting a portion of this money into the Grayscale Bitcoin Trust. In December 2017, the buyers of Bitcoin were mainly retail investors.