Why Shares of Bitcoin Investment Trust Plunged Today

What happened

Shares of Bitcoin Investment Trust (NASDAQOTH: GBTC) are taking a bath today, down by roughly 10% as of 1:30 p.m. EDT, after the value of its underlying bitcoins (BTC-USD) declined over the weekend. As the only quasi-bitcoin ETF available for purchase through a traditional brokerage account, the trust remains one of the easiest ways for speculators to bet on bitcoin’s ups and downs.

So what

Bitcoin is inherently illiquid, and relatively small changes in supply and demand have a pronounced impact on its price.

Data from online cryptocurrency exchange GDAX suggests that a sell order sized at roughly $50 million could send bitcoin plunging by nearly 60%. A similarly sized buy order would send bitcoin soaring, driving the price up 75%.

Image source: Getty Images.

Bitcoin dropped precipitously over the weekend, driving a decline in shares of Bitcoin Investment Trust today. Valued at $7,646 each at 4 p.m. EDT on Friday, bitcoin has since fallen to about $6,700. Shares of Bitcoin Investment Trust, which trade over the counter, do not trade over the weekend, so shareholders who wanted to cash out had to wait until today to make their trades.

Now what

After a stock split earlier this year, each share of Bitcoin Investment Trust represents ownership of approximately 0.001 bitcoin, meaning that one would have to own roughly 1,000 shares to effectively own one bitcoin. Because it’s the only way to own bitcoin through a brokerage account, the fund trades at a significant premium to the value of the bitcoins it owns.

Data source: Grayscale Investments. Chart by author.

At a recent price of $11.43 per share, I calculate that Bitcoin Investment Trust costs roughly 70% more than what its underlying bitcoins are worth, slightly higher than the median premium of about 64% so far in 2018.

Bitcoin may be down, but speculators are willing to pay a very high price to own it in a brokerage account, helping Bitcoin Investment Trust stave off the full brunt of the cryptocurrency’s weekend sell-off.

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Jordan Wathen has no position in any of the stocks or cryptocurrencies mentioned. The Motley Fool has no position in any of the stocks or cryptocurrencies mentioned. The Motley Fool has a disclosure policy.

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