Grayscale and investors face a particular challenge as a result of the GBTC discount.

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The Grayscale Bitcoin Trust continues to sell at a discount to BTC, posing a peculiar threat to Grayscale and buyers.

Since 2013, the Grayscale Bitcoin Trust Fund (GBTC) has provided its owners with exposure to Bitcoin (BTC) via a publicly traded private instrument. However, the trust’s convertibility and liquidity are significantly different from those of an ETF (ETF).

Trusts, at least in regulatory terms, are organised as entities that are ‘closed-end trusts’ that can initially only be offered to approved owners. As a result, the amount of available shares is restricted, and retail traders can only obtain them through secondary markets. A GBTC share, in addition, cannot be exchanged for the underlying BTC position.

GBTC used to trade above the comparable BTC owned by the fund in the past due to the retail crowd’s excess demand. For retail clients, it was common practise to purchase shares directly from Grayscale at par and then sell at a profit during the six-month lock-up era.

GBTC shares sold at a premium to their Net Asset Value (NAV) for the majority of 2020, ranging from 5% to 40%. However, in March 2021, the situation radically improved. The legalisation of two Bitcoin ETFs in Canada aided in the demise of the GBTC premium.

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ETF funds are less speculative and less expensive than trusts. Furthermore, there is no lock-up clause, and institutional buyers have easy access to purchase stock at par. As a result, the advent of a better Bitcoin investing vehicle snatched away most of the allure that GBTC once had.

Can DCG save GBTC?

Grayscale GBTC premium vs. net assets value. Source: Ycharts

The GBTC premium hit difficult territory in late February, and investors started desperately tossing their positions to avoid being trapped in a costly and non-redeemable instrument. Despite BTC hitting an all-time peak in mid-March, the condition has worsened to an 18% discount.

Grayscale Investments’ parent company, Digital Currency Group (DCG), disclosed a deal to buy up to $250 million in GBTC shares on March 10. Although the conglomerate did not explain the reason for the move, the unfair discount would have undoubtedly harmed their image.

As the crisis worsened, DCG announced a plan to convert its trust funds into a U.S. ETF, but no clear promises or timelines were provided.

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On May 3, the company reported that it had acquired $193.5 million in GBTC stock by April. Furthermore, DCG expanded its GBTC share repurchase capacity to $750 million.

With the GBTC trust’s $36.3 billion in assets under administration, there’s reason to think that purchasing $500 million in stock will not be enough to offset the price discount.

As a result, certain critical issues emerge. Will DCG, for example, risk money on such a trade? Who is desperate to sell, and is an ETF conversion being considered?

Looking forward

DCG, as the fund administrator’s controller, has the authority to purchase the trust fund’s stock at market value and redeem the corresponding Bitcoin for redemption. Buying GBTC at a discount and selling the BTC at regular rates will still result in a return, and there is no danger in doing so.

Aside from a few funds who post their assets on a daily basis, there is no way to tell who has been selling GBTC below nett asset value. BlockFi and Three Arrows Capital are the only investors with 5% or more stakes, but neither has confirmed reducing their stake.

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As a result, it is likely that several retail vendors are exiting the commodity at any discount, but this is difficult to determine at this time.

Although purchasing GBTC at a 10% or greater discount could seem to be a good deal at first, investors should keep in mind that there is currently no way to get out of those shares other than to sell them at the auction.

 

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