Why the Wall Street investor who sank Valeant thinks a bitcoin fund is the ‘most dangerous’

Famed investor Andrew Left, who makes his money betting that the shares of companies are overvalued and due for a fall, has a fresh target in his sights: a bitcoin fund.

Left makes the case that Bitcoin Investment Trust GBTC, +8.41%, an investment fund run by Grayscale Investments and designed to track the stratospheric ascent of the world’s most popular digital currency, bitcoin BTCUSD, +0.46% is exorbitantly overvalued relative to its underlying asset and poised to tumble.

Bitcoin Investment Trust holds 174,174 bitcoins, which equates to a total value of about $830 million for the investment vehicle, based on bitcoin’s most recent level late Thursday in New York at $4,775.04, according to digital-currency news and research site Coindesk.com.

Bitcoin is up 400% year to date, but the Grayscale fund is up an eye-popping 726% so far this year, according to FactSet data.

By comparison, the Dow Jones Industrial Average DJIA, +0.25% and the S&P 500 index SPX, +0.57% are both up at least 10% so far this year.

Moreover, the problem is that Bitcoin Investment Trust maintains a market value of $1.8 billion. In other words, Grayscale’s bitcoin fund is more than twice the value of bitcoin — an asset that is itself the subject of a litany of bubble calls.

“That alone is completely ridiculous, but on top of that they don’t even have insurance for the bitcoin that they are custodians of,” Left told CNBC on Thursday during an interview on “Fast Money,” referring to its valuation.

Bitcoin Investment Trust, which made its debut on the over-the-counter market in 2015, is a so-called open-ended trust and the first publicly traded bitcoin-related investment vehicle. Open-ended trusts can be bought just once a day at the market’s close, compared with exchange-traded funds that trade like stocks.

Grayscale, which is in the process for registering with Wall Street regulators to trade on the New York Stock Exchange, cannot publicly comment.

To be sure, Left isn’t the only person pointing out the chasm between BIT’s valuation and its underlying asset. Back in June, ETF.com analyst Sumit Roy warned of the dangerous dynamic playing out in BIT.

“For investors buying into the fund, such large premiums are a disaster waiting to happen,” he said.

Roy said that Grayscale’s fund has benefited from being one of the few investment funds that offers an opportunity to buy bitcoin without owning it directly from sites like Coinbase.com. But as the market for so-called cryptocurrencies evolves, it is expected that other funds will enter the scene, which could put significant pressure on BIT’s price.

Left agrees and said his call is less a bet on the vagaries of bitcoin itself, which is an extremely volatile asset, and more about the structure of Bitcoin Investment Trust, which he said also charges a hefty fee, relative to other funds. The fund’s expense ratio is 2%, which is pricey compared with other investment vehicles that charge a fraction of that cost.

As far as bitcoin goes, Left said he feels that the record-setting currency is entering thin air.

“I’m not here to opine on the future of bitcoin…but the higher things go the thinner the air becomes,” he said

He issued an account of his bearish Bitcoin Investment Trust outlook via Twitter.

$GBTC Warning Investors- No Reason this trades higher than $550 a share. Do you know what you own? The most dangerous way to own Bitcoin pic.twitter.com/aVz15iv4GI

Citron Research (@CitronResearch) August 31, 2017

Left came to prominence in 2015 with a call on Valeant Pharmaceuticals International Inc. VRX, +1.74% which he accused of creating fraudulent invoices through a network of pharmacies it controls, comparing the firm with the likes of Enron Corp.