Owning Bitcoin vs Grayscale Bitcoin Trust — What’s the Difference?

Owning Bitcoin vs Grayscale Bitcoin Trust — What’s the Difference?

Bitcoin symbol against stock market graphs

Unlike stocks which are almost always bought through and held by a brokerage, cryptocurrencies like Bitcoin offer much more flexibility. They can be bought and held on an exchange like Coinbase, held in a personal wallet without a custodian, and they can even be traded directly between people.

One method of buying Bitcoin that has caught the attention of many investors is the Grayscale Bitcoin Trust – a fund that behaves just like a stock that is intended to allow investors to get price exposure to Bitcoin without owning actual Bitcoin.

Is buying shares in a Bitcoin trust like the one offered by Grayscale the right choice for you? Read on as we go over the pros and cons of buying Grayscale shares versus owning actual Bitcoin using a company like Coin IRA.

Grayscale Bitcoin Trust – What Is It, and Who Is It For?

The Grayscale Bitcoin Trust (GBTC) is a fund that trades on the OTCQX market, the highest quality tier of OTC markets that offer trading in companies that are not listed on traditional exchanges. The fund buys and holds a set amount of Bitcoin and then maintains a balance of Bitcoin held on deposit for each share of the fund. According to its official website, each share of GBTC represents 0.00094716 BTC.

Currently, there are two ways to invest in GBTC. The most direct route is to purchase them on the OTCQX.  Alternatively, accredited investors may periodically be able to invest in a GBTC “Offered Product” which may come at a preferable price but has fairly steep entry requirements. Namely, the Offered Product sale is only available at certain times, requires investors to be accredited, and has a $50k minimum investment.

As with mutual funds and some ETFs, Grayscale charges an annual fee of 2%. Additional fees you might see from buying GBTC could include brokerage commission fees. Not all brokerages – especially discount ones – support OTCQX market trades.

Who is the right audience for GBTC?  Since GBTC behaves more like a stock, it makes sense for those that only want to interact with stocks and stock-like funds. A person could have tax or other financial liability concerns when dealing with Bitcoin. By wrapping the Bitcoin inside of an exchange-traded investment, an investor can insulate themselves from making contact with the real cryptocurrency. GBTC may also make sense for those looking to make quick or short-term trades.

However, an investment platform like GBTC will definitely not be for everyone. With its 2% annual fee, potential commission fees, and minimum investment requirements to get the best deal, those looking to avoid fees and high barriers to entry might want to avoid GBTC. As its annual fee is recurring (you pay it every year), those with a long-term investment horizon stand to lose a significant portion of their investment just from fees. Finally, buying GBTC does not provide much in terms of tax incentives. You can expect to pay full capital gains taxes as you would with any other stock or ETF.

Owning Real Bitcoin 

While indirectly investing in Bitcoin through something like GBTC may come with a few convenient features, there is a multitude of reasons why owning real Bitcoin through a company like Coin IRA might be better for you.

The first and most important thing we need to consider is the cost. While investing in a managed fund like GBTC comes with regular annual fees and high upfront minimums, Coin IRA has a one time fee at the time of purchase, not a recurring fee, and charges nothing at the point of liquidation. The 2% annual fee that Grayscale charges may not matter to those looking to quickly buy and sell shares in search of short-term profits. However, for those looking for a long-term investment a recurring 2% fee can greatly impact their bottom line.

Next, let’s review the tax implications. Buying and selling any type of share on a stock market will create immediate taxable events. Strategies that involve regular buying, selling, and re-buying will face the brunt of this reality as the tax bill at the end of the year piles up. Investment accounts such as 401(k)s and IRAs operate in a manner that is highly tax-efficient. These accounts allow you to shelter your earnings from taxes for years or even decades, allowing them to grow unencumbered. And with digital assets like Bitcoin, taking a long-term approach is likely going to produce the best results.

Finally, it’s important to think about the difference between owning actual Bitcoin versus having shares in a Bitcoin fund. With Coin IRA, investors actually own Bitcoin or a number of other available virtual currencies, not some derivative, and owning Bitcoin in your IRA comes with even more advantages including institutional-grade, segregated, multi-asset cold storage for full custody for your digital assets.  Your IRA assets are also protected by crime insurance that covers internal and external theft on assets held in the care, custody and control of the custodian’s chosen storage provider.  You can gain peace of mind knowing your digital currencies are protected with a combination of advanced security practices and a suite of customized insurance solutions.  While there are no requirements for understanding how to secure Bitcoin and keep it protected from hackers, viruses, and other digital threats when you opt for GBTC, ultimately you still own a derivative of Bitcoin, not the real thing.

And with Coin IRA, IRAs are established with a professional custodian and guided by experts that have years of retirement experience.  It’s never too late to start a long-term, growth-focused strategy with Bitcoin – no matter what the price is today.

How Should You Invest in Bitcoin?

Each investor is different, so you will need to weigh the pros and cons of GBTC and direct Bitcoin ownership against your own investment goals. However, it is logical to say that if your goal is to make quick, short-term trades against the price of Bitcoin without actually holding any, a Bitcoin fund like Grayscale might be appropriate for your strategy.

Depending on the type of funds (qualified retirement funds or regular savings) you want to use to make your purchase, you may elect to buy Bitcoin and hold it yourself.  Just keep in mind that with this strategy you will need to be responsible for keeping your Bitcoin safe.  Any security failures could result in the total loss of your investment.

Finally, if you are investing for the long term and want to allow your investment to grow without an immediate tax burden, you may find a lot more benefit to your bottom line by allowing the experts at Coin IRA to present your options and guide you to the finish line.