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Analysts Warn Investors About Bitcoin Trust’s Price, Citing a ‘Bubble’ in Soaring Value

Last Updated March 4, 2021 4:56 PM
Lester Coleman
Last Updated March 4, 2021 4:56 PM

The rapidly spiking price of bitcoin has caused some analysts to warn investors about investing in Barry Silbert’s Grayscale Bitcoin Investment Trust (GBIT).

Bubbles have started to form for bitcoin’s price, according to Parke Shall, a financial analyst at Orange Peel Investments, writing in Seeking Alpha. Shall noted that the bitcoin price traded at over $1,800 Thursday morning, which is 40% more than where it was a short time ago.

The influx of capital has contributed to the bubble, Shall warned. He said he wanted to prevent people from buying bitcoin at a 70% premium. The intraday price for the GBIT was as high as $265 on Wednesday before dropping back to $210 to $220, he noted, delivering losses that are not in line with bitcoin’s movements.

The intraday swings cannot be seen on bitcoin price charts since the charts show the cryptocurrency’s closing prices, Shall said.

The GBIT price was $219 at the time of this report.

GBIT Raises Concern

Shares of the GBIT traded at an 80% premium at one point this week, he noted. The GBIT is the only brokerage-tradable asset for trading bitcoin, which puts GBIT in demand.

Ian Bezek, an investment analyst at Kerrisdale Capital Management LLC, wrote yesterday in Seeking Alpha that the Bitcoin Investment Trust is irrationally overpriced because its price is moving at a much faster pace than bitcoin.

The situation won’t end well, Bezek noted.

Bitcoin reached all-time highs at the end of April, and after breaking a technical resistance, has started to go “parabolic.” He said the price is up almost $500 in the past two weeks.

Not A Normal Market

Bezek warned it is not a normal market with the sort of “frenetic topping” action that occurs as wild moves hit an emotional peak. He said silver experienced drastic dollar-a-day moves as it neared a peak around $50 per ounce in 2011.

Bitcoin is not necessarily immediately topping, Bezek said, adding it could rise for a few more days before breaking.

Given the market’s fundamental illiquidity, Bezek said it is hard to short bitcoins, as opposed to silver, gold, crude, and other alternative investments that are given to one-way moves. Bitcoin has inherent limitations that can permit the parabolic run to go longer than expected.

Bezek said there is nonetheless a difference between buying bitcoin and a less even bitcoin trust.

GBIT has far outpaced the moves in bitcoin itself, he said. GBIT has more than doubled while bitcoin itself is up only around 50% since April. This means GBIT is trading at a massive premium to its actual value.

GBIT is intended to be worth a tenth of a bitcoin per share minus management fees that accumulate over the years, Bezek noted. A GBIT price of $255 indicates that bitcoin is trading around $2,700, which is far higher than bitcoin is currently trading.

Also read: SEC issues cease and desist against Bitcoin Investment Trust

A 50% Price Premium

At Tuesday’s close, a $233 GBIT share was backed by $158 of bitcoin, Bezek noted, indicating a GBIT buyer is paying around a 50% premium to get access to the bitcoin trust.

There are advantages to buying a publicly listed asset, but Bezek said it is not worth a 50% premium. People complain about paying a 2% to 3% premium in the physical gold market.

Once bitcoin stops rising, those owning GBIT will have to consider their positions rationally. Bitcoin would need to top $2,700 for a purchaser at today’s GBIT price to break even, he noted, assuming GBIT eventually returns to its NAV.

Featured image from Shutterstock. Chart from Grayscale.