We believe that GBTC’s significant premium over NAV translates to significant risk in investing in GBTC long-term. Our estimate suggest a potential price target in the range of $8-$10, representing a potential 40% downside from current levels. We substantiate our bearish view by the fact that GBTC’s significant premium to NAV will lead to downside as the momentum behind cryptocurrency speculation cools and other funds become available. We arrive at our estimate by crediting GBTC with a 10-15% premium over NAV because of the sheer convenience factor – GBTC allows investors that are not tech-savvy to get exposure to Bitcoin through a traditional investment vehicle.
At a 70% premium to NAV, we believe that the current valuation is unsustainable, especially as alternative options arise to invest in cryptocurrencies. We think that the premium is also subject to considerable headline risk as the underlying asset has run into increasing regulatory scrutiny, both domestically and internationally. Now you might wonder why this exorbitant premium exists, we posit three theories.
For one, some investors prefer to hold traditional investment vehicles, in other words those that are registered securities. This means that holding Bitcoin directly a nonstarter for some investors. Second, some investors do not want to deal with the complexity and risk of handling bitcoin themselves (dealing with multiple illiquid exchanges, human error, cryptocurrency idiosyncrasies, etc.). Last, we think some investors likely don’t realize that they are paying such a large premium on GBTC over what is the actual asset value.
However, we do NOT suggest shorting GBTC at the current point as short interest has increased dramatically, and the asset is relatively expensive to borrow at this point. Shorting GBTC is hindered by the relatively small amount of shares available to borrow (<$200mm by our estimates) and expensive borrow costs (>20%).
If another Bitcoin ETF were approved and listed, the premium on GBTC would likely disappear very quickly. We think that speculators would likely put downward pressure on the GBTC premium if they think approval of an ETF is likely (and if they can find a borrow to short the stock). We would watch carefully for the next Bitcoin ETF filing as a potential catalyst for entering a short position on GBTC.
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