Grayscale Bitcoin Trust (OTCMKTS: GBTC) Stock is the Bitcoin Derivative of Choice

Bitcoin tracking stock Grayscale Bitcoin Trust OTCMKTS: GBTC is an unofficial exchange-traded-fund (ETF) that invests in bitcoin through derivatives to track the price performance of bitcoin (BTC). Technically, the U.S. Securities and Exchange Commission (SEC) has yet to officially approve a bitcoin ETF. In absence of a pure tracking stock, traders/investors have plunged into the “junior miners” of digital gold through shares of Riot Blockchain (NASDAQL RIOT) and Marathon Patent Group NASDAQ: MARA. The Grayscale BTC is considered the bitcoin tracking stock of choice amongst institutions.  The GBTC is the most liquid pure bitcoin tracking stock on the U.S. exchanges. The year-to-date (YTD) performance as of Jan. 15, 2021 is 36% versus 1.22% of the benchmark S&P 500 index NYSEARCA: SPY.

When the performance is this skewed, it spawns a phenomenon called fear-of-missing-out (FOMO).  Narrative impacts sentiment which impacts price. However, when price makes a parabolic move, it reshapes the narrative and sentiment. The recovery of bitcoin back to 20,000 stoked painful memories for those who chased and stopped out as it lost over 70% of its value. However, when bitcoin surged through 30,000, that’s when the proverbial “slate” was cleaned and lit the FOMO again. Hi-risk tolerant investors looking for speculative exposure in bitcoin can monitor Grayscale Bitcoin Trust for opportunistic pullbacks to scale into a position.

What is Grayscale?

The Grayscale Bitcoin Trust was created in September 2013. While not officially an SEC approved ETF, it is one of the oldest closed-end-funds (CEFs) tracking bitcoin. It employs a passive management system that also has an embedded premium to bitcoin in addition to a 2% management fee. Cryptocurrency traders may find it ludicrous to pay a premium to invest in a tracking stock that only operates during market hours, when you can invest directly in bitcoin through a digital wallet. GBTC is for those investors and traders that prefer to simplify the task of getting exposed to bitcoin without having to own a digital wallet and deal with the fees or large spreads that exchanges charge, especially with zero-commission brokers. Since GBTC is a stock, capital gains/losses are easily calculated while providing exposure to the underlying commodity but most importantly, it provides liquidity. There are “alternative” tracking stocks, but they don’t have nearly as much daily trading volume and liquidity as GBTC.

Institutional Participation

GBTC averages over 15 million shares per day. Aside from actually trading bitcoin, it is one of the most liquid ways to gain exposure in bitcoin. It is the preferential gateway for institutional investors like Guggenheim that are prohibited from purchasing bitcoin directly, thus invest in GBTC. Guggenheim CIO, Scott Minerd predicts bitcoin to reach $400,000. It has set allocated up to 10% of its $5.3 billion Macro Opportunities Fund for investment in GBTC. CoinFund’s Seth Ginns pegged a $1 million price target bitcoin.

Why Grayscale vs. MARA/RIOT

The analogy would be like investing a gold ETF versus a miner like Freeport-McMoRan NYSE: FCX. One is tracking the actual commodity, while the latter is speculating on the potential output based on the price of the commodity. The commodity doesn’t have overhead and operating expenses like the latter. The other problem with bitcoin miners is the structure of bitcoin has an embedding mechanism for diminishing returns. The price action of bitcoin miners don’t always mirror that of bitcoin. Bitcoin was created to limit total supply at 21 million. Currently, there is nearly 18.6 million bitcoins in circulation. As more mining rigs go online, the complexity and difficult of successfully mining a block of bitcoin becomes more difficult. Additionally, bitcoin “halves” itself every 2,016 blocks (an average of four years). This means that miners get paid (-50%) less almost every four years, while limits the supply of new bitcoins and thereby causing price spikes purely driven by scarcity then FOMO. To successfully mine a single block of bitcoin originally paid out 50 bitcoins. Due to the halving, the payout has been reduced to 6.25 bitcoin. The next halving will reduce the payout to 3.12 bitcoin and so forth. Therefore, the bitcoin miners depend on bitcoin prices rising to make the effort profitable, at least in theory.

Regulatory Risks

This is the wildcard. Central banks and governments are threatened by a decentralized “currency” that is known for being used illegally. The U.S. government regulates banks implemented stringent Know Your Customer (KYC) regulations in an effort to combat money laundering, often penalizing banks with hefty fines. Cryptocurrency exchanges and wallets continue to face scrutiny and regulatory risks. However, the acceptance by public companies like PayPal NASDAQ: PYPL adds more credibility to bitcoin. Companies like MicroStrategy NASDAQ: MSTRinvested $1 billion of their cash directly into Bitcoin. Prudent investors looking for a simple way to get exposure in bitcoin can watch GBTC for opportunistic pullback levels.

 GBTC Opportunistic Pullback Levels

Using the rifle charts on the weekly and daily time frames enables a more precise near-term view of the price action playing field for GBTC stock. Keep in mind that GBTC is correlated to the price moves of bitcoin. The weekly rifle chart is uptrending with the weekly 5-period moving average (MA) just above the $32.93 Fibonacci (fib) level. GBTC pierced and has pulled back under its weekly upper Bollinger Bands (BBs) at $45.19. The weekly stochastic has stalled above the 80-band indicating a potential mini pup thrust higher or a crossover down to test the 80-band again. The prior 80-band crossover down attempt was deflected back up as shares bounced offer the $19.63 fib in November setting up the current leg up. The daily rifle chart formed a  market structure low (MSL) trigger above $22.87 surging shares up towards the $48.75 fib before peaking out. The daily stochastic has cross down through the 80-band forming a mini inverse pup. The daily 5-period MA support is sloping down as a channel tightening forms towards the 15-period MA at $37.34. Nimble traders and high-risk tolerant investors can monitor for opportunistic pullback levels at the $35.85 fib, $34.52 fib, $31.83 fib, $28.89 fib and the $26.42 fib.