GBTC's negative premium has reached a historic high. Is another crash coming?
The negative premium of GBTC has reached a historical high of 46%.Source: Financial Times
Compiled by: DeF's Way
After the collapse of FTX, the focus has shifted to the Grayscale Bitcoin Trust (GBTC), which currently has a negative premium of 46%, the highest in history. This means that since Bitcoin peaked in November 2021, investors in this trust have lost 83%, exceeding the 74% decline in Bitcoin's own value.
What is Grayscale?
Grayscale owns the world's largest Bitcoin trust—GBTC, which allows investors to gain exposure to Bitcoin.
Investors can hold Bitcoin exposure without purchasing Bitcoin.
Similar to the SPDR Gold Trust, GBTC's value comes from the actual $BTC it holds and is publicly traded on OTCQX.
Grayscale's Holdings:
Holds 673,000 BTC, accounting for 3.5% of all available #BTC. GBTC is currently valued at $10.6 billion, down from $13.5 billion two weeks ago.
Holds 3 million ETH, currently valued at $3.6 billion, down from $4.8 billion two weeks ago.
Holds 106,000 shares currently valued at $1.4 million vs. $3.9 million.
- 2018 bear market: GBTC plummeted 90.5% over 13 months before bottoming out.
- 2022 bear market: Currently, #GBTC has dropped 85% and remains in a major downtrend.
The implosion of the cryptocurrency exchange FTX has weakened confidence in digital assets, with its impact rippling through an industry worth nearly $1 trillion due to complex and often opaque connections among major players.
Concerns about Grayscale have intensified following the announcement last Wednesday by cryptocurrency broker Genesis Trading, which initiated over $50 billion in loans last year, to suspend redemptions and loan issuance in its lending department.
Both Grayscale and Genesis are subsidiaries of Digital Currency Group (DCG), a venture capital firm based in Stamford, Connecticut, USA.
Genesis is an authorized participant of GBTC, responsible for issuing new shares, until last month when Grayscale launched its internal brokerage dealer, Grayscale Securities.
According to data from Refinitiv, DCG is also the largest shareholder of GBTC, owning 4.1% of the shares, or 28.2 million shares.
The core issue facing GBTC is that it has been replaced by better Bitcoin holding tools.
When it was launched in 2013 as a private placement, it was one of the few products of its kind, and as the crypto industry expanded, it rapidly increased its share count to absorb the incoming cash flow.
However, it was disrupted by the emergence of Canada's first Bitcoin exchange-traded fund in 2021. The fees for these investment tools are typically less than half of the 2% annual fee charged by GBTC. They also offer greater liquidity, allowing new investors to avoid paying a premium.
As funds flow out of GBTC, the supply-demand imbalance of its shares drives its stock price significantly below its net asset value.
The fundamental issue is that—unlike ETFs—GBTC lacks an arbitrage mechanism to restore balance to supply and demand.
GBTC shares cannot be redeemed 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 a share buyback program.
Conversely, Grayscale hopes to convert GBTC into a "spot" Bitcoin ETF that holds "physical" currency. These plans have so far been blocked by the U.S. Securities and Exchange Commission (SEC), which has refused to follow the lead of Canadian and other regulators in approving spot Bitcoin ETFs, citing concerns about potential fraud and manipulation in unregulated trading venues.
Grayscale has declined to comment on the matter and is currently suing the SEC for the right to convert GBTC. However, the continuously widening GBTC negative premium indicates that very few market participants believe it is likely to succeed.
"If they win the lawsuit, then any investor will be whole. The discount will shrink dramatically because the [creation and redemption] process can occur freely," said Todd Rosenbluth, head of research at VettaFi.
The ETF Store President Nate Geraci stated, "The structure of GBTC is clearly not ideal, as shares cannot be redeemed.
"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 could address the discount issue. This is yet another example of the absurd regulatory dysfunction affecting the entire crypto ecosystem," Geraci added.
Some investors remain confident. Ark Investment Management is already the third-largest shareholder of GBTC, holding nearly 1% of the shares, and purchased an additional $2.8 million worth of shares this week.
In October, Ark CEO "Cathie Wood" stated that given the potential for GBTC to convert to an ETF at some point, its trading price is at a "fire sale" price. Ark is also seeking permission to launch a spot ETF but has stated it will not comment on daily trading activities.
The second-largest shareholder is BlockFi, holding 2.9%, a cryptocurrency lending and trading platform that has halted customer withdrawals due to "significant risk exposure" to FTX.
Peter Tchir, head of macro strategy at Academy Securities, proposed the prospect of Grayscale seeking approval to buy back a large number of shares and then liquidate the fund, potentially earning profits sufficient to offset its fee income loss and attract external investors throughout the process.
However, Geraci believes that the GBTC negative premium could further widen, "especially if the fallout from FTX continues to impact the entire crypto space."
Nevertheless, he believes GBTC "is clearly a better option than holding Bitcoin on exchanges like FTX, as investors can operate with confidence knowing that the underlying Bitcoin does exist."
Additionally, Geraci believes that the collapse of FTX strengthens the case for regulating cryptocurrency exchanges, "theoretically accelerating the timeline for spot Bitcoin ETF approvals."
However, Rosenbluth believes the SEC will view this disaster as a validation of its stance.
"The SEC sees spot Bitcoin as risky and is concerned about fraud and manipulation. I'm not sure they would be surprised by these developments."
