Grayscale Bitcoin premium rises as BTC price falls below $35K – What does this mean?

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According to a recent market perspective issued by Glassnode, institutions are returning to the Bitcoin market following the May 19 crisis.

Bitcoin (BTC) has crashed by around 44% from its all-time high of $64,899, signaling an end to its second-largest bull run that started in March 2020. Many analysts, including those from BiotechValley Insights, see “terrible technicals” in the Bitcoin market, noting that the flagship cryptocurrency could extend its ongoing decline until $20,000.

Nevertheless, Glassnode Insights, a weekly newsletter issued by on-chain data analytics service Glassnode, anticipates a Bitcoin price recovery in the sessions ahead, based on an on-chain indicator that serves as a metric to gauge institutional interest in the cryptocurrency.

Enough with discounts

The Grayscale Premium statistic analyzes money flows into the Grayscale Bitcoin Trust (GBTC), the main investment vehicle for institutional investors seeking exposure to the Bitcoin market.

A growing Grayscale Premium indicates a greater influx of bitcoin into Grayscale Bitcoin Trust. As a result, GBTC trades at a premium to the current price of BTC. A diminishing Grayscale Premium, on the other hand, indicates a decline in BTC inflow, causing GBTC to trade at a discount to Bitcoin spot prices.

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Throughout January 2021 and the first half of February 2021, the Grayscale Bitcoin Trust drew more than 50,000 BTC to its holdings. GBTC traded at a 10-20% premium in the said period, showing a rising institutional interest.

Grayscale BTC holdings so far in 2021. Source: Glassnode

Despite this, the premium dipped below 10% in the early half of February. GBTC began trading at a discount to spot prices. During the same time span, the BTC/USD spot rate rose from the mid $30,000s to about $65,000 in April. By that time, the GBTC premium had fallen to zero.

On May 13, two days before Elon Musk’s Bitcoin market meltdown on May 19, the GBTC premium peaked at 21.23 percent. It demonstrated that institutional interest for bitcoin investment products has slowed since late February.

However, the price drop on May 19 enhanced the Grayscale Premium, according to Glassnode Insights. The indicator has rebounded to -3.8 percent, indicating that institutional interest, or “or at the very arbitrage trader conviction,” has increased in parallel with dropping Bitcoin spot prices.

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Grayscale Premium recovering after GBTC at a discount 3 months in a row. Source: Glassnode

The Canadian Purpose Bitcoin ETF followed a similar discounting pattern, with sustained capital inflows through late April and early May, followed by withdrawals as institutional demand weakened. Glassnode made the following observation:

“However, similar to GBTC, demand flows appear to be recovering meaningfully in following the price correction with inflows back on the rise as of late-May.”

Buying the Bitcoin price dip?

The disparity between lower Bitcoin spot rates and higher GBTC prices demonstrated that institutions have not completely abandoned the crypto sector. Instead, it demonstrates that the sell-off has prompted investors to purchase shares in Grayscale Bitcoin Trust and Canadian Purpose Bitcoin ETF. Glassnode wrote:

“Institutional products GBTC and the Purpose ETF are showing signs of recovery despite collapsing prices providing early signs of renewed institutional interest.”

The analytics portal also referenced to indicators indicating that the bulk of selling in the most recent BTC price drop looked to be short-term holders. Long-term investors, on the other hand, purchased the price drop “with conviction.”

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