Trading in the Bitcoin Investment Trust (BIT), an open-ended trust invested exclusively in bitcoin, may have contributed to the November spike in bitcoin’s price, according to The Wall Street Journal. On Oct. 21, for the first time, the spread between publicly-traded shares in the fund and the bitcoin price became negligible. On Nov. 3, 71,000 shares traded and the bitcoin price surged. A spokesman for the trust said the narrowed spread probably attracted investors to BIT. Arbitragers often try to profit from changes between assets and price, but do so, they must take a position in the asset.
On Oct. 21, the spread between shares and the price closed at a 1.9% premium. More than 71,000 shares valued at $3.5 million traded on Nov. 3, 20 times the average, and the bitcoin price jumped 53% from Oct. 21 and Nov. 4.
The price moved from $250 to a $450 peak in early November before declining to well below $400. Michael Sonnenshein, a spokesperson for the Digital Currency Group which owns the trust’s sponsor, Grayscale, said the smaller spread in November likely attracted investors.
Arbitragers trading electronic fund transfers (ETFs) try to profit from changes in the spread between underlying assets and the publicly-quoted price. But in order to do this, they have to take a position in the asset itself. The increased trading could have triggered buying which drove up the price.
Gil Luria, an analyst at Wedbush Securities and an early Wall Street bitcoin supporter, said the additional liquidity and easier access to investors have helped build a more fluid bitcoin market.
The spread between the publicly traded shares and the price has widened since early November. Fund trading volume has declined and the price rally abated, although in recent days, the price has rallied to the $400 mark.
BIT derives its value entirely from the price of bitcoin. It enables investors to gain exposure to the price movement of bitcoin without the challenge of buying, storing, and safekeeping bitcoins.
Each BIT share represented ownership of 0.1 bitcoins initially. The trust does not generate any income and regularly sells and distributes bitcoins to cover its expenses. Therefore, the amount of bitcoin represented by each share gradually declines over time.
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Last modified: July 22, 2020 11:27 AM UTC