Grayscale’s Bitcoin Trust (GBTC) made headlines yesterday with its one-day record addition of 16,244 bitcoin, adding to its stack of more than 630,000 bitcoin and assets under management (AUM) totaling around $ 23 billion. Evidently, business is going well. So, who are the grayscale investors? Is the GBTC award an incentive or a disincentive? And where will that fund move in the future?
What is GBTC?
The grayscale has bitcoin in its GBTC fund and investors buy shares that represent several of those bitcoins. There is a management fee of 2 percent per year, in addition to a “premium”. The prize is the difference between the value of the underlying bitcoin (native asset value or “NAV”) versus the market price of the holdings (how much the shares cost).
There are two layers of investors. There are base-layer investors – accredited investors selected to buy the private placement of the fund at the “NAV” price, also known as the price of the underlying bitcoin value. Base layer investors can send USD or bitcoin and receive a number of shares equivalent to the bitcoin value (currently it is 0.00094919 BTC / share).
Another catch is that it is a path. Once you put bitcoin in the bottom, it cannot be removed. Investors can sell their shares, but bitcoin will remain in the trust and out of the market.
“Bitcoin Trust in shades of gray does not currently operate a redemption program and may interrupt creations from time to time. There can be no guarantee that the value of the shares will approximate the value of Bitcoin held by the Trust and the shares can be traded at a substantial premium or discount in relation to the Bitcoin value of the Trust. The Trust may, but will not be required to, seek regulatory approval to operate a redemption program. “
Small print of the gray scale website
Base layer investors have a six-month block before they can sell their shares on the open market to the second layer of investors. These secondary investors must pay the highest market price for the shares. Again, the “premium” is the difference between the price of open market shares and the underlying shares priced at bitcoin.
How are grayscale investors doing?
The largest investor is Three Arrows Capital, which recently increased its position from $ 259 million to $ 1.4 billion (equivalent to about 6% of the fund’s stake). It is one of the investors who takes advantage of the recent trading by entering as a private placement in the bottom tier of the fund.
When investing in NAV, in the base layer, her shares are locked for six months, but then she can sell the shares at the highest market price, locking the premium. The premium historically remains at around 20%, but it can boom in a bull market, where the demand for stocks is high. For example, it exceeded 40% in December 2020.
Another investor taking advantage of this? BlockFi, which owns about 5% of the fund’s shares. Blockfi will give you about 6% return when you lend your bitcoin, because it can then lend your bitcoin to groups like the Grayscale Trust. In this case, he lends bitcoin in shades of gray and goes into the background where he can take advantage of the prize.
For second-tier investors who are buying shares on the open market, the premium is an increasing risk. If bitcoin falls too much, the losses will be greater because you have the NAV (bitcoin price) falling, as well as a drop in the premium you bought. Likewise, if you buy before a bull market and the corresponding premium bomb, your earnings may be higher.
Why the prize? It is the market gap between supply and demand. The demand for shares exceeds the offer, since new shares are created continuously, but are delayed by the six-month block. On the other hand, ETFs keep premiums under control because new shares can also be created continuously, but are not blocked and can be traded immediately. Prizes can be arbitrated.
Is the prize worth it?
Why do smaller secondary investors accept this premium risk from GBTC instead of a pure bitcoin purchase?
For one, you can easily buy it with your traditional brokerage account. Two, you avoid personal guard. Three, there are tax advantages as it is eligible for IRA. And fourth, if you think there is an impending bull run, you can take advantage of a premium bomb.
Accredited investors obviously have a strong incentive with the premium to enter private placement, but it is more than that. For some institutional investors, GBTC is one of the few ways in which they can gain exposure to bitcoin. Many investment funds have regulatory rules that restrict direct investment in cryptocurrencies and / or do not want the hassle of custodying bitcoins. But, basically, everyone is able to invest in exchange-traded assets, such as the GBTC, so they get the best of both worlds. Its internal regulations allow and avoid self-care.
But it will not last forever. As the market matures and there are more options for trading bitcoin in a public market (such as a bitcoin ETF), there will be fewer secondary investors willing to pay the premium and it will decrease to meet less demand. When this occurs, GBTC is likely to reduce its management fee above the average of 2 percent and the file to be converted to ETF.
Overall, the GBTC premium takes place in the secondary market and offers a very attractive deal for accredited investors who can join the private placement and invest in bitcoin NAV at the fund’s base level. However, that premium will begin to disappear as the market matures and more options for trading bitcoin in the public market emerge.
This is a guest post by Ellie Frost. The views expressed are entirely their own and do not necessarily reflect those of BTC Inc or Bitcoin Magazine.