Bitcoin LIC is a "golden goose" at war

Chris Meyer

Pinnacle Investment Management Limited

As Geoff Wilson prepares to go to 'war' with his latest LIC (his "preferred investment vehicle" according to the WAR prospectus issued on Friday), the world's biggest Bitcoin LIC is currently waging its own war. It's going to lose this one. 

The Bitcoin LIT earning $756m a year

One of the "stats incredible" pickups of the year was by this week, where they highlight that the Grayscale Bitcoin Trust (ticker GBTC) earns revenues of US$756 million per annum off a US$36 billion asset base at a whopping 2% p.a. fee. Those revenues are nearly as much as the US$1 billion Vanguard earns from all of its 82 US-listed ETFs combined, with nearly US$2 trillion of assets. GBTC is truly the Golden Goose of Bitcoin products. This Golden Goose, however, is having its eggs scrambled by the recent arrival of Bitcoin ETFs.

No longer the only game in town

GBTC is a closed-end listed investment trust (LIT) that for many years has been the only way for US investors, in particular, to buy Bitcoin through a traditional brokerage account. This scarcity value coupled with the meteoric rise of the Bitcoin price in the last 12 months has seen the assets under management of GBTC rise 10-times from US$3.5 billion a year ago to US$36 billion today. But something sinister lurks beneath the surface. 

As with any closed-end LIC/LIT, readers will know that the share price of GBTC can trade at a premium or discount to its underlying NAV. While GBTC was the only game in town, it traded at a significant premium to its NAV as the chart shows. At times in 2018, this premium to NAV was as high as 80%. As recently as December 2020 during the recent Bitcoin mania, the premium was still 40%. Investors were seriously overpaying for their Bitcoin exposure paying this kind of premium to NAV.  

In February 2021, this all changed, as the ETF industry went to war with this Bitcoin Golden Goose. The war kicked off in Canada with the listing of the first ETF that invests in Bitcoin, as we wrote about in this Wire at the time. These Bitcoin ETFs became an instant hit and the first Bitcoin ETF by Canadian issuer Purpose gathered nearly $1bn of assets in its first month. Investors loved the lower fees (1% vs 2%) and the fact that you could buy and sell at NAV (a hallmark of an ETF vs a LIC). 

The GBTC share price almost immediately went to a discount to NAV as these ETFs arrived, and as of 6 May 2021, GBTC was trading at a whopping 16% discount to NAV, a stark reversal from the NTA premium only weeks before. The Bitcoin price has remained strong throughout this period so it's not a collapse in the Bitcoin price that has scared off buyers of GBTC. This is a strong indication that GBTC's scarcity premium has gone. 

Where to from here

GBTC now has the classic LIC dilemma. It's tough to give up on the 756 million eggs the Golden Goose lays every year. As investors flee GBTC for cheaper and more efficient alternatives, because of the closed-end nature of GBTC, the assets don't leave the trust so the golden goose keeps laying those eggs. 

If new buyers don't show up, however, as they gravitate to Bitcoin alternatives such as these new Bitcoin ETFs (this choice of alternatives will only grow when the US approves Bitcoin ETFs, likely in the next few months) the current NAV discount of GBTC is likely to persist. 

While it is still early days, if GBTC is faced with a persistent discount to NAV, it may be forced to undertake some remedial action. Share buybacks, a cut in its fees or at the extreme, converting itself into an open-ended ETF may all be on the cards. Implementing some of these measures, as we've seen in the UK and Australian LIC markets, shows it's better to adapt than die....but the Golden Goose will lay fewer eggs.

Ironically, at a 16% discount to NAV, GBTC today could be one of the best ways to invest in Bitcoin. Buying $1 of assets for $0.80 is one of the rare opportunities that can exist with LICs and is one of the opportunities that exist in the Australian LIC market today, after an annus horribilis in 2019/2020. This investing in "discounted asset opportunities" is in the first sentence of Geoff Wilson's chairman's letter in the WAR prospectus. Perhaps WAR should go to war with the Golden Goose and buy some shares of GBTC. 

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This communication was prepared by Pinnacle Investment Management Limited (ABN 66 109 659 109 AFSL 322140) (‘Pinnacle’). Past performance is for illustrative purposes only and is not indicative of future performance. Unless otherwise specified, all amounts are in Australian Dollars (AUD). This communication is for general information only and was prepared for multiple distribution. Whilst Pinnacle believe the information contained in this communication is reliable, no warranty is given as to its accuracy, reliability or completeness and persons relying on this information do so at their own risk. Subject to any liability which cannot be excluded under the relevant laws, Pinnacle disclaim all liability to any person relying on the information contained in this communication in respect of any loss or damage (including consequential loss or damage), however caused, which may be suffered or arise directly or indirectly in respect of such information. The information is not intended as a securities recommendation or statement of opinion intended to influence a person or persons in making a decision in relation to investment. The information in this communication has been prepared without taking account of any person’s objectives, financial situation or needs. Any persons relying on this information should obtain professional advice before doing so. The issuer is not licensed to provide financial product advice. Please consult your financial adviser before making a decision. Any opinions and forecasts reflect the judgment and assumptions of Pinnacle and its representatives on the basis of information at the date of publication and may later change without notice. Any projections contained in this presentation are estimates only and may not be realised in the future. The information is not intended as a securities recommendation or statement of opinion intended to influence a person or persons in making a decision in relation to investment. Unauthorised use, copying, distribution, replication, posting, transmitting, publication, display, or reproduction in whole or in part of the information contained in this communication is prohibited without obtaining prior written permission from Pinnacle. Pinnacle and its associates may have interests in financial products and may receive fees from companies referred to during this communication.

Chris Meyer
Pinnacle Investment Management Limited

Chris is part of the Pinnacle executive management team and responsible for driving the listed products business. Pinnacle’s mission is to establish, grow and sustain a diverse and complementary stable of world-class, specialist investment managers

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