Traders Piling Into Overvalued Crypto Funds Risk a Painful Exit
One of the simplest ways to buy Bitcoin also has a quirk that could lead to bigger losses.
Many investors racing to get in on Bitcoin’s big rally have bet on the cryptocurrency through investment trusts rather than buying the coins themselves. These fund-like trusts have some advantages: Their shares can be bought and sold through ordinary brokerages, without the need to set up digital wallets or move money to a crypto exchange. And some institutional investors, barred by the rules of their funds from holding Bitcoin directly, have also turned to trusts. Cathie Wood, for example, has made the Grayscale Bitcoin Trust the fourth-largest holding in her Ark Next Generation Internet ETF.
But the market value of the trusts can swing way above or below the value of the Bitcoin they hold, adding a new element of risk for an already volatile investment. Take the $25 billion Grayscale trust. Demand was so relentless in December that the trust’s price soared 40% above its net asset value—that is, the market value of all the Bitcoin it holds. Essentially, at the top, investors were indirectly paying $14,000 for the equivalent of $10,000 in Bitcoin. That’s bad enough. But when Bitcoin falls, the value of trusts like Grayscale could sink below that of their holdings, further amplifying investor losses.