The Ultimate Guide To Buying Bitcoin Investment Trust

Bitcoin investment trusts are a way to invest in Bitcoin without buying the cryptocurrency directly. They hold Bitcoin and allow investors to trade shares through brokerage or retirement accounts. The Grayscale Bitcoin Trust (GBTC) is one of the most popular choices, with $21.7 billion in assets under management as of 2021. Another option is the iShares Bitcoin Trust (IBIT), which is the second-largest spot Bitcoin ETF. It is highly liquid and has more than $17 billion in assets under management. Bitcoin investment trusts may offer a simpler way to invest in cryptocurrency, but there are downsides to consider, such as high fees and the risk of volatility.

How to buy Bitcoin Investment Trust on the stock market

Bitcoin trusts hold digital currency, allowing investors to trade shares through brokerage or retirement accounts, rather than cryptocurrency exchanges.

The Grayscale Bitcoin Trust (GBTC) is a digital currency investment product that makes bitcoins available to individual and institutional investors. The trust is solely and passively invested in BTC, enabling investors to gain exposure to BTC as a security while avoiding the challenges of buying, storing, and securing the bitcoins directly.

GBTC shares can be traded through brokerage firms and are also available within tax-advantaged accounts like individual retirement accounts or 401(k)s. This presents a potential tax benefit for investors, allowing them to gain exposure to bitcoin in a tax-friendly manner, a significant advantage considering the capital gains tax implications of direct cryptocurrency investments.

GBTC is known for its high management fees (1.5%) compared with other pooled investment vehicles. The fee structure could erode returns, especially in a bear market, making it a less cost-effective option for investors looking to gain exposure to bitcoin. The high fees are frequently cited as one of the main problems with GBTC when compared with other traditional investment vehicles or even other bitcoin ETFs.

Another significant advantage of GBTC is its security. Storing cryptocurrency safely is challenging, and Grayscale says its assets are safeguarded in line with the best industry standards. Investing in GBTC sidesteps the common security risks of cryptocurrency exchanges and wallet providers. These platforms are frequently targeted by hackers, and many investors have lost funds from security breaches.

To buy Bitcoin Investment Trust on the stock market, you can follow these steps:

• Open an account with a brokerage firm that offers GBTC, such as Grayscale or a similar platform.
• Fund your brokerage account with fiat currency (e.g., USD, EUR) or other cryptocurrencies.
• Search for GBTC or the specific Bitcoin Investment Trust you want to purchase.
• Place a buy order for the desired amount of shares.
• Review the order details, including the price and quantity, before finalizing the purchase.
• Monitor your investment and consider holding for the long term, as Bitcoin tends to be volatile in the short term.

Keep in mind that investing in Bitcoin and Bitcoin trusts carries risks, including volatility and regulatory uncertainty. It's essential to do your research and consult with a financial advisor before investing.

The differences between buying Bitcoin Investment Trust and buying Bitcoin directly

There are several differences between buying Bitcoin Investment Trust and buying Bitcoin directly. Here are some key distinctions:

Investment Process

• Buying Bitcoin directly: Involves purchasing and owning Bitcoin tokens through a cryptocurrency exchange like Coinbase. This approach provides direct ownership of the digital currency.
• Bitcoin Investment Trust: This option is for investors who want exposure to Bitcoin without the complexities of direct ownership. The trust, created by Grayscale, functions similarly to a Bitcoin ETF. Investors buy shares of the trust, which holds Bitcoin as its primary asset.

Responsibilities and Risks

• Buying Bitcoin directly: Requires individuals to take responsibility for storing and securing their Bitcoin in a digital wallet, which carries risks of hacking or loss.
• Bitcoin Investment Trust: The trust assumes the responsibility of securely storing Bitcoins on behalf of its investors. It partners with a cryptocurrency wallet service, Xapo, to keep its Bitcoins in "cold storage vaults," protecting them from online hacking attempts.

Fees and Pricing

• Buying Bitcoin directly: Generally involves lower fees as there are no ongoing management fees associated with direct ownership.
• Bitcoin Investment Trust: Charges a 2% annual management fee, which is considered high compared to other trusts and ETFs. This fee can erode returns and make it less cost-effective over time. Additionally, shares of the trust often trade at a premium above the actual underlying value of the Bitcoin assets.

Access and Flexibility

• Buying Bitcoin directly: Provides direct access to the cryptocurrency market and allows individuals to buy, sell, and trade Bitcoin on exchanges.
• Bitcoin Investment Trust: Offers a simplified way to gain exposure to Bitcoin price movements without the need to understand the intricacies of cryptocurrency transactions. However, it adds an extra layer of complexity and uncertainty to the already complex nature of Bitcoin.

Suitability

• Buying Bitcoin directly: Suitable for individuals who are comfortable with the risks and volatility associated with direct cryptocurrency ownership and have a good understanding of blockchain technology and cryptocurrency exchanges.
• Bitcoin Investment Trust: Attractive to investors who are interested in cryptocurrencies but are cautious about the risks involved. It provides a more traditional investment structure and can be traded through brokerage firms, IRAs, and 401(k)s, offering potential tax advantages.

The risks of buying Bitcoin Investment Trust

While Bitcoin Investment Trusts are a way to gain exposure to Bitcoin's price movements without directly buying, storing, or securing the cryptocurrency, there are several risks to consider before investing. Here are some of the key risks associated with investing in Bitcoin Investment Trusts:

• Volatility and Fluctuating Market: The Bitcoin market is highly volatile and unpredictable. The price of Bitcoin fluctuates constantly, making it difficult to predict if you will get a return on your investment. Small investments over time may be a more beneficial strategy to mitigate the risk of significant losses.
• Cyberattacks and Fraud: Cryptocurrency is technology-dependent, making it vulnerable to cyberattacks and hacking attempts. There have been reports of buyers losing their investments on exchanges and mining losses due to hacking. Additionally, the lack of security measures in the Bitcoin market creates a significant risk for investors.
• Limited Regulation: The Bitcoin market currently operates with little to no major regulations. The lack of taxation and government stance on cryptocurrency can lead to uncertainty and potential problems in the future.
• Technology Reliance: As a digital currency, Bitcoin is entirely reliant on technology. Without the underlying technology, Bitcoin becomes worthless. This reliance on technology makes Bitcoin owners more susceptible to cyber threats and online fraud.
• High Management Fees: Bitcoin Investment Trusts, such as Grayscale Bitcoin Trust (GBTC), are known for their high management fees compared to other investment vehicles. These high fees can erode returns, especially during bear markets, making them less cost-effective for investors.
• Trading at a Discount or Premium: Bitcoin Investment Trusts periodically sell private shares to accredited investors. When these investors sell their shares on public markets, the prices may not match the underlying asset's value, known as trading at a discount or premium. This adds another layer of volatility to the investment.
• Competition and Regulatory Uncertainty: The emergence of new forms of cryptocurrency and competition from digital currencies backed by traditional currencies has increased market volatility. Additionally, uncertainty about future regulations and the potential for market manipulation has made institutional investors and trust portfolio managers cautious about including Bitcoin in fiduciary accounts.

The advantages of buying Bitcoin Investment Trust

The Bitcoin Investment Trust is a trust created by the cryptocurrency investment firm Grayscale that functions similarly to a Bitcoin ETF, allowing investors to speculate on the price of Bitcoin. Here are some advantages of buying Bitcoin Investment Trust:

• Reducing the risk of losing your bitcoin after death – By investing Bitcoin in a trust, you can ensure that the wealth generated by long-term Bitcoin investing is passed on to beneficiaries and loved ones.
• Ensuring privacy and security – Investing Bitcoin in a trust keeps it out of probate, saving beneficiaries time and money, while also keeping your Bitcoin private and reducing the risk of exposure to digital attacks.
• Quick access for beneficiaries – If Bitcoin is distributed through a will or if allocations are not made prior to death, the transfer will be subject to probate, which can take weeks or months. Holding Bitcoin in a trust avoids this process, allowing beneficiaries to access the Bitcoin much sooner.
• Enhanced security – The probate court process is a matter of public record, exposing your Bitcoin holdings. Trust documents, on the other hand, are not public, keeping your Bitcoin holdings private.
• Convenience – IBIT, for example, can help remove operational burdens associated with trading and holding Bitcoin directly, as well as potentially high trading costs and tax reporting complexities.
• Exposure to Bitcoin without the operational burden – Bitcoin trusts allow investors to buy exposure to the digital currency through brokerage or retirement accounts without the wallet, key, or storage concerns of cryptocurrency exchanges.

The tax implications of investing in Bitcoin Investment Trust

The Grayscale Bitcoin Trust (GBTC) is a digital currency investment product that makes bitcoins available to individual and institutional investors. It is traded through brokerage firms and is also available within tax-advantaged accounts like individual retirement accounts or 401(k)s.

The trust structure may provide certain tax advantages or considerations that individual investors should review with a tax advisor. The taxation of cryptocurrency and crypto-related investments is complex, and the tax treatment of GBTC shares may vary based on individual circumstances and tax laws.

In general, the sale or exchange of tokens is a taxable event. Most trades count as short-term capital gains, which can be taxed at up to 39% depending on the income bracket. If you hold bitcoin for more than a year and then sell it, you are only liable for a long-term capital gains tax, which is levied at a significantly lower rate of 15% to 23.8%.

If you are investing in Bitcoin through a retirement account, selling GBTC to move into an ETF has no tax implications. This is also true for investors moving from any other Bitcoin stock or security, such as MicroStrategy Inc. or one of the Bitcoin mining companies such as CleanSpark or Bitfarms Ltd.

However, if you have GBTC in a taxable account, the tax implications will depend on whether your position was an unrealized gain or loss. If you had an unrealized gain, selling this investment to invest in an ETF would trigger a taxable gain. This means the capital available for reinvestment in the ETFs is effectively diluted by the tax.

If you had an unrealized loss, the wash sale rule could apply. While the sale of GBTC to buy a different asset would technically be a different security, the tax code specifies that the wash sale rule applies when an investor "has entered into a contract or option so to acquire, substantially identical stock or securities." In this case, you would need to determine whether GBTC and the ETFs are substantially identical. If they are, no loss would be allowed on the sale, and the GBTC would get deferred until the replacement assets (the ETFs) are disposed of. In this scenario, if you wish to claim losses from GBTC, you would need to wait 30 days from the sale of your GBTC to purchase an ETF.

It is important to note that the tax basis of Bitcoin becomes more complicated as less straightforward transactions occur. For example, if you receive airdropped tokens or tokens in exchange for a service, these will generally have a basis equal to the fair market value at the time of acquisition.

Additionally, cryptocurrency mining is also considered a taxable event. The fair market value or cost basis of the coin is its price at the time it is rewarded to you. If you run a mining business, you can make deductions to reduce your tax bill, but you cannot make these deductions if you mined the cryptocurrencies for personal benefit.

Finally, it is worth noting that the only way to avoid paying Bitcoin taxes is to not sell or use any during the tax year. Receiving Bitcoin as an airdrop or in exchange for service has tax implications, but most taxable events are triggered by the sale or exchange of the cryptocurrency.

Frequently asked questions