Rises in Bitcoin price have been large, but far less than rises bitcoin arbitrage investment Bitcoin Investment Trust shares. The divergence will not continue forever, and has widened and closed several times in the past.
Investors may be able to exploit these conditions. It is no secret that Bitcoin prices have been rising aggressively. Trading in Bitcoin primarily occurs via unregulated “exchange” websites. Security issues, corruption, or simply poor operating practices have caused multiple exchanges to fold in recent years. Alternatively, investors who want to go “long” in Bitcoin can hold it in wallets on their own personal computers, or with other 3rd parties, but this just shifts security responsibilities away from the exchanges, but does not eliminate them.
The value of GBTC shared implicitly depends on the security of Xapo’s IT systems and handling of the trust’s Bitcoins. The latest quarterly report discusses a risk that Xapo has not been able to insure its Bitcoin holdings. Since the monetary value of holdings is substantial, and Xapo serves other customers in addition to the trust, Xapo may targeted by sophisticated cybercriminals, insiders, or other threats. Without insurance, this could wipe out the value of GBTC shares. GBTC substantially outperforming underlying Bitcoin prices recently.
Why could this be happening? First, there is a lack of easy availability to trade in Bitcoins for many players who do not want to setup accounts with unknown exchanges on the Internet, but do have accounts that allow access to trade in GBTC via OTCQX. In a strange way, GBTC can be viewed as more liquid than the underlying Bitcoin. Second, it seems very likely that many people are simply not aware or don’t care about the difference between Bitcoin and GBTC shares. If using purely technical signals, for instance, GBTC may appear attractive. Whatever the reasons, the fact is that the GBTC price has become very seriously decoupled from its assets, and this could either be corrected or continue.
This decoupling is no secret and several pieces of advice can be found urging people to stay out of GBTC and buy Bitcoins instead. Anyone following that advice recently would have sacrificed large returns, as the divergence has grown much worse. Bitcoin, it would be a challenge to reasonably estimate when or how big an event is possible. GBTC shares through traditional trading channels compared to cryptocurrency exchanges. So, what is the opportunity for traders and investors? A spread like this might naturally seem to suggest an arbitrage strategy, such as shorting GBTC while going long in Bitcoin itself.