Fear of missing out makes crypto's 350% premium look appealing

London

BITCOIN'S awe-inspiring surge to record highs has investors racing for exposure to the rally - even if it means paying an absurdly high markup.

As the largest cryptocurrency rocketed above US$23,000 for the first time this week, the mania pushed the price of the Bitwise 10 Crypto Index Fund (BITW) as much as 650 per cent above the value of its holdings and is currently trading near 350 per cent, data compiled by Bloomberg showed. Meanwhile, the premium on the Grayscale Bitcoin Trust (GBTC) swelled to 34 per cent amid the rally.

Such dislocations mean that large institutional investors and mom-and-pop traders alike have to pay up massively to purchase shares, versus buying the underlying holdings outright. But as Bitcoin's 200 per cent year-to-date rally attracts feverish attention, and stokes fears of further missing out on the gains, demand for anything with a crypto wrapper is booming.

For those investors looking for access to Bitcoin but who are reluctant or unsure how to get direct exposure, the ease of buying products like BITW or GBTC through a brokerage platform trumps the extra cost.

"The answer isn't as simple as 'does it make sense to pay for that?' in a vacuum. It makes absolutely no sense to pay that premium," said James Seyffart, a Bloomberg Intelligence ETF analyst. "But I think some level of premium is justified, and if you want access to Bitcoin, there really aren't better options."

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BITW has soared 165 per cent since its debut earlier this month, far outpacing the gains in Bitcoin and Ether. GBTC has climbed roughly 40 per cent over that time period. That outperformance creates the gap between the products' prices and the net asset value of their underlying holdings.

Those dislocations occasionally appear in the US$5 trillion exchange-traded fund (ETF) universe but rarely surpass 3 per cent or so. When they do, specialised traders known as authorised participants step in to arbitrage the gap away by creating or redeeming shares of the ETF.

However, given that the Securities and Exchange Commission has not yet approved the ETF format for cryptocurrencies, no such intermediaries exist for the Bitwise and Grayscale products.

Neither vehicle allows for redemptions, meaning that a fixed number of shares are issued, though secondary offerings are allowed by GBTC for institutional investors who contribute Bitcoin. Even so, that can create staggering discounts or premiums when supply and demand imbalances arise.

Companies that dabble in crypto-related industries have served as a proxy for exposure since the Bitcoin bubble of 2017. Investors took that to a new extreme when businessintelligence firm MicroStrategy moved its treasury holdings into the cryptocurrency in August, prompting its shares to more than double.

The premiums showcase "overwhelming investor demand to obtain Bitcoin exposure through means other than direct ownership or via crypto exchanges", said Nate Geraci, president of the ETF Store, an investment advisory firm.

"It's absolutely mind-boggling that regulators allow retail investors to access these products, but won't allow a Bitcoin ETF which would easily solve the premium issue."

A rough back-of-the-envelope calculation suggests that at a 34 per cent premium, investors are paying the equivalent of US$30,522 if Bitcoin's price is US$22,800 per coin. At BITW's 358 per cent premium - which does not just hold Bitcoin - that sum balloons to US$104,424.

But still, for investors looking for crypto exposure in retirement accounts or other portfolios, buying shares of BITW or GBTC is likely seen as the easiest way outside of using a digital-asset trading platform, said Mr Seyffart. BLOOMBERG