Just last week, popular cryptocurrency bitcoin plummeted 25% from all-time highs. But over the last 24 hours, bitcoin is rebounding sharply. According to CoinDesk, it’s up 14% as of 12:30 p.m. EST.
With the Grayscale Bitcoin Trust, investors can benefit from the rising price of bitcoin without directly owning tokens. To directly own bitcoin, you need a bitcoin wallet or an account with a cryptocurrency exchange (like Coinbase). But Grayscale Bitcoin Trust is a way institutional investors like hedge funds can gain exposure. Furthermore, individual investors could gain tax advantages by holding shares of the trust in their individual retirement accounts (IRAs).
Grayscale, however, does hold bitcoin directly. It physically buys tokens for the trust, and it could be very actively doing that right now.
Barry Silbert is the CEO for Digital Currency Group, parent company of Grayscale. I was unable to track down information from Grayscale directly, but Silbert’s Twitter account has been busy putting out information on Grayscale Bitcoin Trust. Recently he tweeted out that the trust had reopened to new investors and it was buying new bitcoin tokens as a result.
Just how much is Grayscale Bitcoin Trust buying? Reportedly, the trust purchased 2,172 bitcoin tokens yesterday alone. Here’s why that number, if true, explains a lot: There’s only an estimated 900 new bitcoin tokens mined per day right now. Therefore, demand from Grayscale Bitcoin Trust far outpaced new supply, probably contributing to bitcoin’s gains over the past 24 hours.
This is similar to what happened when MicroStrategy was gobbling up bitcoin last month. In December, the company raised $650 million via convertible notes to buy bitcoin. During the days that followed, this one company’s demand alone outpaced bitcoin’s new supply. MicroStrategy now holds 70,470 tokens on its balance sheet at an average price of $15,964 each. Considering the price of bitcoin is up roughly $5,000 over the past 24 hours, the value of MicroStrategy’s balance sheet has also surged by roughly $350 million in unrealized gains over this time period. That’s why its stock is up today.
Marathon, Riot Blockchain, and Bit Digital are all bitcoin-mining companies and none reported news today. But these three penny stocks have been among the most popular for traders recently, leading to high volatility and pushing their market-cap valuations north of $1 billion. These companies are taking advantage of their high stock prices in recent days by diluting shareholders to raise cash.
Earlier this week, Bit Digital raised $80 million from a private investor through convertible notes, shrugging off fraud allegations. Similarly, Marathon has more than doubled its share count in recent weeks, raising cash to buy new mining equipment. Marathon’s need for more money is a reminder that these bitcoin-mining operations constantly upgrade equipment (especially when the price of bitcoin rises) to keep up with bitcoin’s rising hashrate. Therefore, it wouldn’t be shocking to see Riot Blockchain announce a stock offering of its own soon.
When it comes to cryptocurrencies like bitcoin, future values are hard to predict since they’re very different from stocks. A stock represents a business, which provides a degree of predictability. By contrast, bitcoin doesn’t produce anything, so I encourage investors to think in terms of supply and demand. If demand outpaces supply (like when MicroStrategy and Grayscale are buying) then bitcoin can keep going up. If demand dissipates, then bitcoin could fall. Can you make an educated prediction on future demand? If not, it might be best to just stick to stocks.
MicroStrategy’s business has been stuck in neutral in recent years, so its stock will likely keep going up and down with the price of bitcoin for now. And as I previously alluded, frothy valuations and the need to upgrade equipment make bitcoin mining stocks a poor investment as well.
That leaves Grayscale Bitcoin Trust. On a fundamental basis, shares trade far beyond the underlying value of the bitcoin tokens it holds. But demand for this vehicle remains strong nonetheless. In its most recent update, it pointed to a record inflow of investments, which could keep shares trading beyond their apparent intrinsic value for now.