Just a few days after GBTC traded at a 15% discount to its BTC equivalent, Grayscale Investments has temporarily closed the trust to investors.
Grayscale Investments’ Grayscale Bitcoin Trust (GBTC) has been under the heat for the last couple of weeks as it traded below the Bitcoin equivalent for each share. The instrument trades on over-the-counter markets and is by far the largest listed cryptocurrency asset.
Periodically, the private-placement offerings for GBTC shares are temporarily closed, along with similar products offered by Grayscale Investment such as its Ethereum trust. As of March 7, both GBTC and the Digital Large Cap Fund (GDLC) are under such periods.
The fact that one of the only investment vehicles containing Bitcoin (BTC) has temporarily closed its issuance, along with the timing of the pause, seems a bit odd, as GBTC reached a record-high 15% discount to the BTC-equivalent for each share on March 5.
GBTC shares used to trade above the equivalent BTC held by the trust, an effect caused by the excess retail demand. Meanwhile, institutional clients were able to buy shares directly from Grayscale at par.
This demand instability created an arbitrage opportunity where clients could buy at par directly from Grayscale Investments, hold their shares for the six-month lock-up period, then sell them on secondary markets with a premium attached.
This strategy yielded excellent results, as the GBTC premium over its BTC equivalent content ranged from 5% to 40%. It is worth noting that excess demand on secondary markets caused this imbalance, as nonaccredited investors are unable to directly access Grayscale’s private offers.
On Feb. 27, this situation changed abruptly as the GBTC premium turned into a discount. At the time, BlockFi’s cryptocurrency lending wing and the Three Arrows Capital arbitrage desk held over 5% of the outstanding shares, according to disclosures required by U.S. Securities and Exchange Commission rules.
This means that if either one of the above liquidates a significant position, their move will be made public. Regardless of who was behind the abrupt selling pressure, it’s important to understand what may have caused it.
Canada’s Bitcoin ETF presented a better product
The recent approval of two Bitcoin exchange-traded-funds in Canada is likely one of the most significant contributing factors that impacted the GBTC premium. The Purpose Bitcoin ETF saw an impressive 11,446 BTC ($584 million) come under management in less than two weeks. While this sum seems insignificant next to GBTC’s $31.2 billion, the ETF offers a better risk/reward, as reported by Cointelegraph.
This is because the Purpose ETF fees are 1% versus the 2% levied by GBTC. Moreover, there is no lock-up period, and retail investors can attain direct access to buy Purpose Bitcoin ETF shares at par. Therefore, the emergence of a better Bitcoin investment vehicle seized much of allure that GBTC once possessed.
An increasing number of GBTC shares are being unlocked
The 36,000 BTC equivalent of GBTC shares issued in August 2020 finished its six-month lock-up in February.
This increase in “unlocked” GBTC represents $2 billion at the current $56,800 BTC price and potentially adds pressure to the GBTC shares. This potential impact is relevant even if most of the volume is closing a premium arbitrage trade by purchasing a BTC futures contract while selling the GBTC shares.
Even though BTC futures are liquid enough to absorb this volume, GBTC shares could see lower retail demand because of the previously discussed ETF effect — not to mention the negative sentiment that followed after BTC hit the $58,300 top on Feb. 21, and then dropped by 26%.
Nevertheless, the 15% GBTC discount seen on March 5 versus its BTC equivalent does not seem sustainable. Even if there is currently no way for a market maker to buy those shares and convert them back to BTC, Grayscale Investments could buy them back and profit from the difference.
As things currently stand, GBTC holders are not likely to panic sell during this unusual circumstance. On the other hand, those waiting for a 5% or higher premium to reemerge will likely be disappointed, as the Canadian ETF seems a better product for retail investors.
by Marcel Pechman