Explaining the GBTC discount

GBTC is a company/stock that does just one thing: it owns Bitcoin.

HOWEVER, you would think if it owns $100 worth of Bitcoin it would have a market cap of $100. But it doesn't. It is trading at a 50% discount. For every $100 of Bitcoin it owns it is trading for just $50 of that.

This doesn't mean it's a sell or buy but many people are curious why this is and there is a lot of misinformation about this. Note again: I am not recommending one way or the other. Just explaining.

There's an entire category of stocks that trade at discounts to the assets they own and GBTC is one of them.

They are called closed end funds. Closed end funds typically own municipal bonds and pay out hefty (often tax-friendly) dividends.

They often trade at a 10-15% discount to the assets they own (a discount to their "net asset value" or NAV).

An example is BlackRock California Municipal Income Trust , which trades on the NYSE. Note: I am NOT recommending it either way. Just using it as an example.

They trade at a 15% discount to their NAV. Earlier this year, they traded at a 9% discount.

A VERY TYPICAL HEDGE FUND STRATEGY: is to buy CEFs that are trading at a statistically significant discount to NAV compared with their average discount to NAV.

Because then there are three ways to make money:

a) the discount becomes less so the stock goes up even if the value of the assets remain the same.,

b) the value of the assets go up plus you have a buffer in case they go down (because of the discount)

c) if they have a higher than usual discount, you get a higher than usual dividend.

Also, very important, if an activist hedge fund feels the discount is too much they will buy a bunch of shares and force the closed-end fund to turn into a mutual fund. Mutual funds are valued once a day and ALWAYS have a 0% discount.

Since closed-end funds trade like stocks, their price is determined by the supply and demand of shareholders, which is why they almost always trade at a discount to the NAV. So forcing a CEF to become a regular mutual fund removes the discount instantly and is a successful way that some hedge funds operate. I have previously invested in hedge funds like this.

GBTC is trading at a discount because:

- interest in BTC has severely lessened over the past year so there were many more sellers than buyers of GBTC

- People are only willing to hold right now if there is a good buffer for risk against another FTX or any other event that could drive BTC 50% down or more.

If you feel the discount is irrational, then you buy. If you feel it's rational then you leave it alone. If you feel BTC could go down more than 50%, then you would short although 50% is a pretty big discount.

In general, the strategy of buying CEFs at a big discount is a very solid strategy in dark times.

A) because they mostly hold municipal bonds, which very very rarely default.

B) If you buy when the discounts are big, those discounts are usually irrational. Like when there is a panic (e.g. in 2008-9 or in March, 2020).

C) it's good to check if other hedge funds are buying. Then you might see an activist fund buying so you can piggyback them.

Helpful resources:

cefa.org to filter closed-end funds by discounts, etc.

j3sg.com to see what other hedge funds are accumulating.

Good luck with GBTC! I hope this explains things. If you have questions, ask and I will answer.