Grayscale’s Bitcoin Trust (GBTC) made headlines again yesterday with its one-day record addition of 16,244 bitcoin, contributing its stack of more than 630,000 bitcoin and an asset under management (AUM) totaling $ 23 billion. Apparently things are going well. So, who are the investors of Grayscale? Is the GBTC premium an incentive, or a deterrent? And where will this fund move in the future?
What is GBTC?
Grayscale owns bitcoin in its GBTC trust and investors buy shares that represent a number of the bitcoin. There is a management fee of 2 percent per annum, in addition to a ‘premium’. The premium is the difference between the underlying bitcoin value (original asset value or ‘NAV’) versus the market price of the shares (which cost the shares).
There are two low investors. There are the base layer investors – accredited investors who have been chosen to buy at the ‘NAV’ price in the private placement of the fund, or the price of the underlying bitcoin value. Base layer investors can send USD or bitcoin and receive a number of shares equal to the bitcoin value (it is currently 0.00094919 BTC / share).
Another important catch is that it is one way. Once you have placed bitcoin in the trust, it cannot be removed. Investors can sell their shares, but the bitcoin will remain in the trust and out of the market.
‘Grayscale Bitcoin Trust does not currently operate a redemption program and may stop creations from time to time. There can be no assurance that the value of the shares will approach the value of the Bitcoin owned by the Trust, and the shares may trade at a substantial premium or decrease the value of the Bitcoin’s trust. The Trust may, but will not be expected to, request the approval of the regulation to operate a relief program. ”
Fine print from Grayscale’s website
Base layer investors locked up for six months before they could sell their shares in the open market to the second layer investors. These secondary investors have to pay the higher market price for the shares. Again, the ‘premium’ is the difference between the price of open market shares and the underlying bitcoin price shares.
How are gray scale 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 percent in the trust). It is one of the investors taking advantage of the recent trade by entering as a private placement at the bottom of the fund.
By investing in the NAV, on the base layer, the shares are closed for six months, but then the shares can be sold at the higher market price, which can close the premium. The premium remains historically around 20 percent, but can pump into a bull market where demand for stocks is high. In December 2020, for example, it exceeded 40 percent.
Another investor who benefits from this? BlockFi, which owns about 5 percent of the shares in the trust. Blockfi will give you about 6 percent return if you lend it your bitcoin, because it can then lend your bitcoin to groups like the Grayscale Trust. In this case, it borrows the gray scale the bitcoin and goes into the fund where he can utilize the premium.
For the second-tier investors buying shares in the open market, the premium is an increasing risk. If bitcoin drops heavily, the losses will be deeper because you have the net asset value (price of bitcoin) as well as a drop in the premium you bought. If you buy in front of a bull market and corresponding premium pump, your profit can also be greater.
Why the premium? This is the market gap between supply and demand. Demand for shares exceeds supply, as new shares are constantly being created but are delayed by the six-month lock-in. Conversely, ETFs keep premiums in check, as new stocks can also be constantly created, but they cannot lock in and can trade immediately. Premiums can be arbitrated.
Is the premium worth it?
Why do smaller, secondary investors accept this GBTC premium risk over a pure bitcoin purchase?
First, you can easily buy it with your traditional brokerage account. Two, you avoid self-care. Three, there are tax benefits as it is eligible for IRA. And four, if you think there’s an upcoming bull run, you can take advantage of a premium pump.
Accredited investors obviously have a strong incentive to enter the premium, but it is more than that. For some institutional investors, GBTC is one of the few ways they can gain exposure to bitcoin. Many investment funds have charters that restrict direct investments in cryptocurrency and / or they do not want the hassle of preserving bitcoin. But basically, anyone can invest in publicly traded assets, like GBTC, so they get the best of both worlds. Their internal regulations allow this and they avoid having to supervise themselves.
But it will not last forever. As the market matures and there are more options to trade bitcoin on a public market (such as a bitcoin ETF), there are fewer secondary investors willing to pay the premium, and this will drop to lower demand. to provide. If that happens, GBTC is likely to lower the above-average management fee by 2 percent and switch to an ETF.
Overall, the GBTC premium takes place on the secondary market and offers a very attractive trade for accredited investors who are able to join the private placement and invest in bitcoin’s NAV at the base level of the fund. However, this premium will start to disappear as the market matures and more options to trade bitcoin on the public market.
This is a guest post by Ellie Frost. Opinions expressed are entirely their own and do not necessarily reflect those of BTC Inc or Bitcoin Magazine.