Grayscale Crisis: Is the GBTC Premium "Good Days" Gone Forever?

This article is from PANews, with the original title "Grayscale Crisis: Are the 'Good Days' of GBTC Premium Really Gone Forever?"

Content Overview

* In February this year, Grayscale Bitcoin Trust traded at a discount for the first time in its history;

* The main reasons for the discount sales are twofold: first, new competitors have emerged in the market; second, selling pressure has increased.

* What exactly happened to the Grayscale Bitcoin Trust GBTC premium? Is there a possibility of a premium reappearing in the future?

At the end of February 2021, the Grayscale Bitcoin Trust GBTC, which had been publicly traded for six years, traded at a discount for the first time in history. Now, 30 days later, GBTC is still trading at a discount.

When large investors purchase GBTC through private placements at net asset value (NAV) prices using cash or Bitcoin, Grayscale issues corresponding GBTC shares; these shares then have a six-month lock-up period: they cannot be sold in the secondary over-the-counter (OTC) market until the lock-up period expires. For the past six years, GBTC has been sold at a premium—about 35% higher than its net asset value. But now, Grayscale has started to trade GBTC at a discount (as of the writing of this article, the discount rate is about 4%), with the discount rate peaking at 12% in early March.

The above image is from: The Block Crypto Data, data source: YCHARTS, data extraction date: March 23, 2021

What exactly happened to the Grayscale Bitcoin Trust GBTC premium? Is there a possibility of a premium reappearing in the future?

Grayscale Can No Longer Dominate the Bitcoin Trust Market

One of the main factors affecting GBTC is the recent emergence of new competitors in this field. For institutional investors looking to gain exposure to Bitcoin, Grayscale's GBTC has long been their product of choice, as there have been very few other options available in the market. But now, Grayscale can no longer dominate the Bitcoin trust market.

In recent weeks, many new Bitcoin investment products have appeared in the market, such as several Bitcoin exchange-traded funds (ETFs) approved by Canadian regulators, which have attracted substantial assets in a short period.

On February 11, the Purpose BTC ETF was approved by Canadian regulators, becoming the world's first Bitcoin exchange-traded fund, with total assets exceeding $800 million; additionally, the Rivals Evolve Bitcoin ETF and CI Galaxy Bitcoin ETF have accumulated assets of $84 million and $38 million, respectively.

Nikolaos Panigirtzoglou, Managing Director of JPMorgan's Global Market Strategy Team, stated:

"These newly established BTC ETFs have accumulated a significant amount of funds that would have otherwise belonged to GBTC."

Nikolaos Panigirtzoglou believes that the approval of Bitcoin exchange-traded funds in Canada—especially the Purpose product—has "completely changed the game."

ETFs are more attractive to institutional investors because these investment products are cheaper and allow for continuous issuance and redemption of shares. On the other hand, GBTC and other similar Bitcoin trusts have a "lock-up period," but lack the redemption mechanism of ETFs.

Ben McMillan from RG Alts, a major holder of GBTC shares, stated that the liquidity of the Grayscale Bitcoin Trust remains excellent, making GBTC still an attractive investment product. However, as more Bitcoin investment products enter the market, investors will certainly have more choices, but there is currently no rush to stop using Grayscale's products.

Increased Selling Pressure on GBTC

David Fauchier, a fund manager at crypto asset management firm Nickel Digital, stated that besides the emergence of new competitors, another important factor affecting the GBTC premium is institutional investors selling their shares to realize arbitrage profits.

Historically, GBTC has traded at a premium because it offers a relatively simple way to invest in Bitcoin. Anyone can invest in this product through a broker or directly using retirement account funds to gain Bitcoin exposure without worrying about custody requirements.

To obtain the GBTC premium, many institutional investors have been engaging in arbitrage trading. According to David Fauchier, around July last year was the peak of Grayscale GBTC trading. This is indeed the case, as data compiled by The Block shows that inflows into GBTC continued to grow from around July last year to January this year.

The above image is from: The Block Crypto Data, data source: BYBT, data extraction date: March 23, 2021

David Fauchier revealed: "In July last year, I received many calls from investors who believed investing in Grayscale GBTC was an easy way to make money, and many people flocked in."

Ari Pine, founder of cryptocurrency brokerage Digital Gamma, stated that the rapid growth of GBTC arbitrage trading coincided with the booming cryptocurrency lending market in the summer of 2020. But now, all the GBTC traders who chased the premium last summer are starting to sell, which has pushed down the price of GBTC.

Ari Pine, who has worked in traditional finance, believes that what GBTC is experiencing now has also happened on Wall Street, where selling can be "terrifying" and may drain a stock; in a sell-off, the last one to sell incurs the largest loss.

Of course, some have raised the question: if a premium cannot be obtained, why would investors still choose to sell GBTC shares? Nikolaos Panigirtzoglou explained that this is because investors are concerned that GBTC may "never return to a positive premium."

On the other hand, as more new competitors emerge, selling pressure will further increase, leading investors to think—"What if the Canadian Bitcoin ETF, like the Purpose Bitcoin ETF, becomes the 'new GBTC'?" If competing products grow to the same size and liquidity as GBTC, then over time, the role of GBTC will inevitably diminish, as investors worry about missing out on new investment opportunities and turn to new competing products.

In any case, Nikolaos Panigirtzoglou believes that the "good days" of high GBTC premiums are gone forever. He stated: "Can GBTC trade at a 20% or 30% premium again? I seriously doubt it."

Many industry insiders agree with Nikolaos Panigirtzoglou's view, including David Fauchier from Nickel Digital, Ari Pine, founder of Digital Gamma, Ben McMillan from RG Alts, and Nate Geraci from The ETF Store.

No "New Money" Flowing In

The Grayscale Bitcoin Trust is not only facing selling pressure, but another issue seems even more challenging: there is currently no new capital flowing into GBTC!

For more than a month, inflows into GBTC have remained relatively stable, but just last week, Grayscale stopped new investments in GBTC. Then, Grayscale's parent company, Digital Capital Group (DCG), announced it would purchase up to $250 million of GBTC shares (according to data compiled by The Block, as of February 22, DCG held nearly 12 million shares of GBTC, valued at approximately $633 million).

When asked why Grayscale stopped new investments in GBTC, a representative from the company stated that they would not comment on issues related to GBTC's price.

It is worth noting that if Grayscale makes any moves, cryptocurrency lending service providers like BlockFi and Genesis may be affected, with potential bankruptcy risks, as many traders use BlockFi and Genesis's lending services to buy or borrow Bitcoin to purchase GBTC shares.

As of now, Genesis has refused to comment on this matter, while BlockFi is the second-largest holder of GBTC shares. According to data compiled by The Block, BlockFi holds approximately 36 million shares of GBTC, valued at nearly $2 billion. BlockFi CEO Zac Prince also declined to comment on this matter, but he believes that the discount trading of GBTC creates another arbitrage opportunity that "could be just as interesting as the premium."

Zac Prince stated that since the discount trading of GBTC is not beneficial to its interests, Grayscale may take other measures to address this issue. Perhaps this is one of the reasons why Grayscale's parent company, Digital Capital Group, recently announced the purchase of GBTC shares. Additionally, Grayscale announced on March 17 the launch of five new trust products: BAT, LINK, MANA, FIL, and LPT, aimed at diversifying its revenue.

Zac Prince believes that Digital Capital Group may continue to purchase GBTC shares, and Grayscale may try to convert GBTC into a Bitcoin exchange-traded fund or create a redemption mechanism for GBTC.

Last week, Grayscale posted several job openings related to exchange-traded funds, perhaps indicating that they will work in this direction next.