After months at $250, the price of the digital currency bitcoin took flight in early November, peaking above $450 before falling back to $360 more recently. There is some evidence that trading in a bitcoin-linked fund, Bitcoin Investment Trust
(GBTC), may have played a role in the spike.
On Oct. 21, for the first time since the fund’s May launch on the over-the-counter marketplace OTCQX, the spread between the publicly traded shares of the fund and the price of bitcoin became almost negligible, with the fund closing at a 1.9% premium.
Volume exploded. On Nov. 3, more than 71,000 shares valued at about $3.5 million changed hands—20 times the average. The price of bitcoin, meanwhile, surged 53% between Oct. 21 and Nov. 4, and volume on many bitcoin exchanges took off.
Michael Sonnenshein, spokesman for Digital Currency Group, owner of the $44 million trust’s sponsor, Grayscale, says the narrowed spread likely attracted more investors to the fund.
When trading ETFs, arbitragers often try to profit from changes in the spread between the underlying assets and the fund’s publicly quoted price. To do so, they must take a position in the asset itself—in this case bitcoin. The increased activity on the OTCQX-traded fund may have triggered a wave of bitcoin buying, contributing to the price spike.
“The additional liquidity and easier access to investors is helping create a more fluid market for bitcoin,” says Wedbush Securities analyst Gil Luria.
Since early November, the spread between the fund’s publicly traded shares and the price of bitcoin has widened again, fund-trading volumes have fallen, and the bitcoin rally has abated.
Mr. Curran, a writer in Denton, Texas, is a regular contributor to Dow Jones Newswires and The Wall Street Journal. Email him at [email protected]