These trusts look a lot like mutual funds, so don’t confuse them with the kind of trusts that are associated with estate planning.
Although I’m not going to tell you why they are called trusts, I will tell you why the digital asset community has created them.
You could mine for Bitcoin, but that’s like traipsing into the woods to find some blueberries.
Exchanges aren’t familiar names, can be of questionable financial solvency, are cumbersome to establish, require connections to your bank account, are exposed to hacker risk, and force you to obtain and safeguard passwords or private keys which, if lost, could mean your Bitcoin is lost forever.
Since the SEC has refused to approve any of the many applications for a Bitcoin ETF, the crypto community has released OTC-traded trusts instead.
With mutual funds, the share price is called the net asset value; it’s simply the total value of the assets held by the fund divided by the number of shares that investors own.
Using our above example, if an investor redeems three shares, only 17 will thus exist and the fund’s total assets will thus be $85.
But that’s not how a Bitcoin OTC trust operates.
After 6 or 12 months, the trust’s shares trade OTC.
Indeed, if there are more investors buying shares than selling them, the price can rise above the NAV.
And perhaps the most fascinating aspect of this phenomenon is that the price of the shares can — and often does — move independently from the price of Bitcoin itself.
Sound familiar? It ought to, because it’s the same with closed-end mutual funds.
This premium/discount feature creates a fascinating opportunity for shrewd accredited investors.
Then, you wait a while .
But if the trust’s share price is trading at a 75% premium, your gain would be 162.5%.
If the shares are trading at a discount, you buy them in the OTC market — essentially buying a dollar’s worth of Bitcoin for less than a dollar.
Accredited investors buying shares at NAV via the private placement must wait for the restriction to end; during that time, the OTC trading price could become a discount.
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Many sponsors of OTC trusts say they plan to convert the trusts into ETFs as soon as the SEC permits them to do so.
As of May 25, these OTC securities held $35 billion in digital assets, making them one of the most popular ways for investors to gain exposure to this new asset class.