GBTC Negative Premium Rises to A Record High, Is Thunderstorm Coming Again?

Following the FTX debacle, the spotlight turned to the Grayscale Bitcoin Trust (GBTC), which now has a negative premium of 46%, an all-time high, meaning the trust has lost money since Bitcoin peaked in November 2021, of which the investors have lost 83%, outpacing the 74% drop in the value of Bitcoin itself.

What is grayscale?

Grayscale owns the world’s largest bitcoin trust fund, GBTC, which allows investors to acquire bitcoin, so that investors can hold Bitcoin exposure without buying it.

Similar to SPDR Gold Trust, GBTC value is derived from actual holdings of $BTC and is publicly traded on OTCQX.

Grayscale’s holdings:

1. Holding 673,000 BTC, 3.5% of all available #BTC. GBTC is currently valued at $10.6 billion, compared to $13.5 billion 2 weeks ago.

2. Holding 3 million ETH, currently worth $3.6 billion, compared to $4.8 billion 2 weeks ago.

3. Holding 106,000 tokens currently worth $1.4 million vs $3.9 million.

-Bear Market in 2018: GBTC bottomed out after plunging 90.5% in 13 months.

-Bear Market in 2022: GBTC is currently down 85%, still in a major downtrend.

The implosion of cryptocurrency exchange FTX has eroded confidence in digital assets, with its impact spilling over to a industry worth nearly $1 trillion due to complex and often opaque connections between major players.

Concerns about Grayscale grew after Genesis Trading, the cryptocurrency brokerage that originated more than $50 billion in loans last year, announced a moratorium on redemptions and loans in its lending arm last Wednesday.

Both Grayscale and Genesis are subsidiaries of Digital Currency Group (DCG), a venture capital firm based in Stanford, Connecticut, USA.

Genesis was an authorized participant in GBTC and was responsible for issuing new shares until last month when Grayscale launched its in-house broker-dealer, Grayscale Securities.

DCG is also a largest shareholder of GBTC with a 4.1% stake which is 28.2 million shares, according to Refinitiv data.

The core problem GBTC facing now is that it has been replaced by the emergence of better tools for holding Bitcoin.

When it was offered as a private placement in 2013, it was one of the few offerings of its kind. As the Crypto industry expanded, it quickly increased its share count to absorb the coming surge of cash.

However, it was undermined by the emergence of Canada’s first Bitcoin ETF in 2021. The fees for these investment vehicles are typically less than half the 2% that GBTC charges annually. They also provide greater liquidity without paying a premium for new investors.

As funds flowed out of GBTC, the supply and demand for its stock was out of balance, pushing its stock price significantly below its NAV.

The fundamental problem is that, unlike ETFs, GBTC has no arbitrage mechanism to bring supply and demand back into balance.

GBTC shares cannot be exchanged for physical bitcoin or cash, and can only be sold to other buyers through the over-the-counter market. Grayscale needs regulatory approval to implement the share repurchase program.

Grayscale instead wants to convert GBTC into a “spot” bitcoin ETF, holding the “physical” currency. Those plans have so far been blocked by the U.S. Securities and Exchange Commission (SEC), which has refused to follow regulators in Canada and elsewhere in approving spot bitcoin ETFs, citing concerns about potential fraud and manipulation on the unregulated exchanges where the trades take place.

Grayscale declined to comment for this story and is currently suing the SEC for the right to convert GBTC. However, the widening negative GBTC premium suggests that few market participants believe it has any chance of succeeding.

“If they succeed in winning the case, then any investor will be left intact. The discount will be drastically reduced because the [stock] creation and redemption process can happen freely,” said Todd Rosenbluth, head of research at VettaFi.

Nate Geraci, president of The ETF Store, said, “the structure of GBTC is clearly suboptimal because the shares are not redeemable.”

“It is very disappointing that the SEC continues to allow any retail investor to use the fund, but they will not approve a spot bitcoin ETF that can address the discount. This is another example of the absurd regulatory dysfunction of the entire Crypto ecosystem right now,” added Geraci.

Some investors maintained their confidence. Ark Investment Management, already the third-largest shareholder in GBTC with a nearly 1% stake, bought another $2.8 million in shares this week.

In October, Ark CEO — Cathie Wood said that GBTC is trading at a “fire sale” price given the possibility that it could be converted into an ETF at some point. Ark is also seeking permission to launch a spot ETF, but said it would not comment on day-to-day trading activity.

The second-largest shareholder, with a 2.9% stake, is BlockFi, a cryptocurrency lending and trading platform that has stopped withdrawing customer deposits due to “significant exposure” to FTX.

Peter Tchir, head of macro strategy at Academy Securities, raised the prospect that Grayscale seeks permission to buy back a large number of shares and then liquidate the fund, potentially earning enough profit to cover the loss of its fee income and attract outside investors throughout the process.

However, Geraci believes that the negative GBTC premium has the potential to expand further, “especially if the FTX thunderstorm spread further affects the entire Crypto space.”

Still, he believes GBTC is “clearly a better option than holding bitcoin on an exchange like FTX because investors can operate with confidence that the underlying bitcoin does exist.”

Additionally, Geraci believes the FTX debacle strengthens the case for regulation of cryptocurrency exchanges, “in theory accelerating the timeline for spot Bitcoin ETF approvals.”

However, Rosenbluth believes the SEC will see the fiasco as proof of its position.

“The SEC considers spot bitcoin risky and is concerned about fraud and manipulation. I’m not sure they will be surprised by these developments.”

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(The above information is not intended as investment advice, this article only represents personal opinion)


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