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Ask HN: Does Grayscale charge $400M/year for holding Bitcoin?

So I looked up Grayscales Bitcoin Trust and was surprised that they have an annual fee of 2%: https://grayscale.co/bitcoin-trust/ I am not sure if I understand this number correctly. GBTC currently has a market cap of about $21B. If Grayscale charges 2% of that, this would be $400M per year. $400 million for running a simple algorithm that buys/sells Bitcoin based on in/outflow of investors and keeping those bitcoins safe? This seems pretty much to me. Anything I am missing?

Grustaf 6y ago
2% is a pretty standard management fee, so there’s nothing outrageous about the size. I’m not familiar with their algorithms though, if they simply passively hold bitcoin then it might seem a bit steep.
- Grustaf 6y ago
  Ah it’s publicly traded, so they expose bitcoin to everyone. That must have taken a lot of legal work. Plus they’re not charging a performance fee. Seems pretty reasonable to me.
  - ArtTimeInvestor 6y ago
    Why would someone buy Grayscale then and not just hold Bitcoin in their Paypal account for example?
    - Grustaf 6y ago
      This fund is probably not for retail investors, i guess pension funds or similar institutions invest in it.
      - ArtTimeInvestor 6y ago
        Pension funds are willing to give a away 2% annually to someone else for holding an asset for them?
        Grustaf 6y ago
        Typically funds will also do a lot of work in selecting the asset, but in this case the hard work is in giving them exposure to an asset they couldn’t otherwise have invested in.
        ArtTimeInvestor 6y ago
        Why would they not have been able to buy Bitcoin themselves?
        chefkoch 6y ago
        I would guess it's a too risky investment for them.
        verdverm 6y ago
        There's actually a pretty low-risk 40% gain by doing some paperwork and having access to some big player only loans. See my other comment for a link which describes the play in more detail.
        Grustaf 6y ago
        Starting, not to mention promoting, a large fund takes a lot of work, trust me. I’m not sure what 40% you are talking about though. Not to say that Grayscale is really making the world a better place by providing an actually useful service.
        Grustaf 6y ago
        Bitcoin is still very esoteric, buying bitcoins is nothing like investing in the stock market. A large (or small for that matter) financial institution probably wouldn't want to buy 10 or 100 m worth of bitcoins from Bitmex.
        sarosh 6y ago
        There may be issues in their legal structure the prohibit direct investment or their Board feels more comfortable offloading the technology risk to someone else. Alternatively, they may want certain liquidity features (or other options) that may not be directly available.
    - verdverm 6y ago
      https://adventuresincapitalism.com/2020/11/24/why-this-reflexive-ponzi-scheme-will-continue/ https://adventuresincapitalism.com/2020/11/24/why-this-refle...
      - ArtTimeInvestor 6y ago
        Is this the spread to NAV you mention? https://ycharts.com/companies/GBTC/discount_or_premium_to_nav https://ycharts.com/companies/GBTC/discount_or_premium_to_na... It seems the spread is down to 4% now. And it seems people were willing to pay up to 40% on top of Bitcoins value for GBTC. That is crazy ...
        Grustaf 6y ago
        That probably doesn’t directly benefit Grayscale that much though, depending on their fee structure.
csomar 6y ago
It's a lot worse than that: You pay 10-20% premium on GBTC to the spot price of bitcoin. On the long run, the GBTC and spot prices should be the same. So yes, you are getting a bad deal. However, some investors are not comfortable holding balances in Coinbase or some other exchange; and probably do not think about holding bitcoin in a wallet.
- ArtTimeInvestor 6y ago
  Amazing. So by buying real Bitcoin, you instantly have big advantage over investors in GBTC. Is this the spread we are talking about? https://ycharts.com/companies/GBTC/discount_or_premium_to_nav https://ycharts.com/companies/GBTC/discount_or_premium_to_na... Looks like it is down to 4% at the moment?
  - csomar 6y ago
    Great chart! Yes, looks like the premium was down these days (last few weeks it was insane)
alexmingoia 6y ago
Yup. That’s what funds are: A business that charges rich people money to lose their money.
roycerui 6y ago
Every crypto news seem to link GBTC to BTC price. I don't quite understand how GBTC affect BTC price. Anyone willing to educate me?
nopzor 6y ago
one thing you’re missing is that gbtc investors also get to bet on the spread. this works on sentinment/momentum. for example, right now the spread is about 4%. it’s been as high as 20%+ and can also go below 0%. so if there is a lot of institutional momentum to btc, gbtc has the potential to rise faster than btc itself.

Grustaf 6y ago

2% is a pretty standard management fee, so there’s nothing outrageous about the size. I’m not familiar with their algorithms though, if they simply passively hold bitcoin then it might seem a bit steep.

Grustaf 6y ago
Ah it’s publicly traded, so they expose bitcoin to everyone. That must have taken a lot of legal work. Plus they’re not charging a performance fee. Seems pretty reasonable to me.
- ArtTimeInvestor 6y ago
  Why would someone buy Grayscale then and not just hold Bitcoin in their Paypal account for example?
  - Grustaf 6y ago
    This fund is probably not for retail investors, i guess pension funds or similar institutions invest in it.
    - ArtTimeInvestor 6y ago
      Pension funds are willing to give a away 2% annually to someone else for holding an asset for them?
      - Grustaf 6y ago
        Typically funds will also do a lot of work in selecting the asset, but in this case the hard work is in giving them exposure to an asset they couldn’t otherwise have invested in.
        ArtTimeInvestor 6y ago
        Why would they not have been able to buy Bitcoin themselves?
        chefkoch 6y ago
        I would guess it's a too risky investment for them.
        verdverm 6y ago
        There's actually a pretty low-risk 40% gain by doing some paperwork and having access to some big player only loans. See my other comment for a link which describes the play in more detail.
        Grustaf 6y ago
        Starting, not to mention promoting, a large fund takes a lot of work, trust me. I’m not sure what 40% you are talking about though. Not to say that Grayscale is really making the world a better place by providing an actually useful service.
        Grustaf 6y ago
        Bitcoin is still very esoteric, buying bitcoins is nothing like investing in the stock market. A large (or small for that matter) financial institution probably wouldn't want to buy 10 or 100 m worth of bitcoins from Bitmex.
        sarosh 6y ago
        There may be issues in their legal structure the prohibit direct investment or their Board feels more comfortable offloading the technology risk to someone else. Alternatively, they may want certain liquidity features (or other options) that may not be directly available.
  - verdverm 6y ago
    https://adventuresincapitalism.com/2020/11/24/why-this-reflexive-ponzi-scheme-will-continue/ https://adventuresincapitalism.com/2020/11/24/why-this-refle...
    - ArtTimeInvestor 6y ago
      Is this the spread to NAV you mention? https://ycharts.com/companies/GBTC/discount_or_premium_to_nav https://ycharts.com/companies/GBTC/discount_or_premium_to_na... It seems the spread is down to 4% now. And it seems people were willing to pay up to 40% on top of Bitcoins value for GBTC. That is crazy ...
      - Grustaf 6y ago
        That probably doesn’t directly benefit Grayscale that much though, depending on their fee structure.

csomar 6y ago

It's a lot worse than that: You pay 10-20% premium on GBTC to the spot price of bitcoin. On the long run, the GBTC and spot prices should be the same. So yes, you are getting a bad deal. However, some investors are not comfortable holding balances in Coinbase or some other exchange; and probably do not think about holding bitcoin in a wallet.

ArtTimeInvestor 6y ago
Amazing. So by buying real Bitcoin, you instantly have big advantage over investors in GBTC. Is this the spread we are talking about? https://ycharts.com/companies/GBTC/discount_or_premium_to_nav https://ycharts.com/companies/GBTC/discount_or_premium_to_na... Looks like it is down to 4% at the moment?
- csomar 6y ago
  Great chart! Yes, looks like the premium was down these days (last few weeks it was insane)

alexmingoia 6y ago

Yup. That’s what funds are: A business that charges rich people money to lose their money.

roycerui 6y ago

Every crypto news seem to link GBTC to BTC price. I don't quite understand how GBTC affect BTC price. Anyone willing to educate me?

nopzor 6y ago

one thing you’re missing is that gbtc investors also get to bet on the spread. this works on sentinment/momentum. for example, right now the spread is about 4%. it’s been as high as 20%+ and can also go below 0%. so if there is a lot of institutional momentum to btc, gbtc has the potential to rise faster than btc itself.