Home Deep Analysis GBTC: If you like it’s premium, you’ll like it at 30% off

GBTC: If you like it’s premium, you’ll like it at 30% off

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GBTC: If you like it’s premium, you’ll like it at 30% off


drumming

The Grayscale Bitcoin Trust (OTC: GBTC) is the flagship fund in the Grayscale Digital portfolio. Of the $17 billion in AUM that Grayscale has in its single-asset fund, it accounts for more than $13 billion. Over the past few years, I have covered GBTC twice.This the first time That was in late 2019, when I was highly critical of the fund’s management fees, marketing and NAV premiums.the second time is 13 months later. The reason for writing a follow-up is because I changed my mind. That article is now a year and a half old. The GBTC settings are very different at this point, so I feel the need to update.

discount rate

In January 2021, when I last covered the Grayscale Bitcoin Trust, NAV was still at a 6% premium, now it’s a 30% discount. When I wrote that article, Bitcoin (BTC-USD) was $31,000. Down 32% since then, Bitcoin’s price action has been terrible. For GBTC, though, things were even worse; from just under $33 per share to $14. This price action has also turned the premium to NAV into a sizable discount for most of the fund’s existence.

Grayscale discount trend

grayscale

GBTC stock’s discount to NAV is now around 30%. At this point, the discount rate for GBTC is actually so high that many of Grayscale’s altcoin funds are actually not as discounted as GBTC, and in some cases even at a premium:

Source: Grayscale, as of July 15 close

Probably the two biggest factors driving GBTC price action are 3AC liquidation and repeated denials by the SEC grayscale ETF conversion application.

Three Arrows Capital Sold Out

Three Arrows Capital (3AC) used to be the majority shareholder of GBTC. The cryptocurrency-focused investment fund was forced to liquidate its GBTC positions when the cryptocurrency market unraveled. An entity’s liquidation of 5% of GBTC’s outstanding shares resulted in a significant increase in GBTC’s trading volume during the week of June 13. You can see the week’s volume in darker green in the chart below:

GBTC volume and price

Yahoo Finance

After the market close on Friday, June 10, the average daily volume for the week was 3.7 million shares. But in the following week, when 3AC was thought to have liquidated its GBTC position, the average daily volume soared to 11.4 million shares and the share price fell from $18.68 to $12.47. In my weekly digital market overview for Blockchain Reaction subscribers, I said on Monday, June 20th:

A lot of attention was paid to the fact that GBTC hit a new discounted low late last week. Now that 3AC appears to have closed its GBTC position, don’t be surprised to see a large green candle in grayscale today.

While the stock was not far off from $13, GBTC’s surge in volume in early trading the following week after news of 3AC’s Grayscale stock liquidation spread was massive. Nearly 60 million shares traded on June 21-22. This is about 3 times higher than the average daily volume for the previous week and about 8 times the average daily volume for the first full week of June. The 3AC liquidation was the main catalyst for this volume activity and could be a capitulation signal to the market.

SEC and WSJ

A second issue that could exacerbate the discount rate is the SEC’s repeated rejection of GBTC’s ETF conversion applications. The most recent application was denied in late June, and Grayscale sued the SEC on the same day it was denied. Grayscale argues that the SEC acted maliciously when it discovered the Bitcoin ETF and was arbitrarily applying securities laws.

Conventional wisdom holds that spot Bitcoin ETFs will help drive institutional demand for safer investments in Bitcoin. The U.S. Securities and Exchange Commission, currently headed by Gary Gensler, has repeatedly rejected requests for spot ETFs but allowed bitcoin futures ETFs. The Wall Street Journal recently published an editorial board opinion piece on how Gensler and GBTC’s ETF switching plans continue to be blocked by the SEC. The Wall Street Journal did nothing to criticize Gensler. The editorial board begins with an aggressive tone:

SEC Chairman Gary Gensler has a regulatory vision for the cryptocurrency market, holding investors hostage in the process. This is the best way to explain the agency’s blockade of spot bitcoin exchange-traded products (ETPs).

The editorial also pointed out why a futures ETF without a spot ETF would be foolish. If accusing Gensler of holding investors hostage wasn’t hot enough, the real heat might come in the last paragraph:

Members of Congress from both parties have written to Mr. Gensler asking about his hijacking. Maybe they should call him to explain why he’s undermining crypto innovation and investor protections — and remind him who controls the agency’s wallets.

I think that’s important. We now have a major financial opinion-driven publication calling on the regulator and the chairperson who oversees the agency. It’s a big deal, and I think it adds credibility to Grayscale’s polarizing decision to resolve the issue through litigation. We’ll see how it turns out. Meanwhile, another ETF switch has been rejected, so it may be priced at a discount to NAV.

risk

Grayscale’s Bitcoin Trust is probably one of the riskiest ways to buy Bitcoin. This is a derivative that charges a high management fee but does not offer redemption and you cannot trade it outside of normal market hours. If you’re a HODLer, GBTC doesn’t do it. Additionally, the private placement is currently closed, so Grayscale appears to be a net seller of Bitcoin at this point as Grayscale continues to deduct management fees from the fund through BTC holding decay.

Grayscale BTC net open interest drops

Total GBTC holdings drop (coin glass)

Additionally, Grayscale is now in a legal battle with the SEC. In the eyes of U.S. regulators, it’s an expensive and potentially damaging fight for Grayscale.

generalize

What GBTC offers investors is a tax-advantaged way to gain exposure to Bitcoin, whether it’s converted to an ETF or not. I personally own GBTC stock in the Roth IRA. This means that any potential realized gains from holding bitcoin through the fund’s stock will not be taxed. Despite the management fee, I think this is a strong reason to focus on GBTC. Also, if you like the fund’s small premium (as I did in January 2021), you can get a 30% discount.

In my last article on Bitcoin Seeking Alpha, I explained why I think market sentiment has become too one-sided. I still hold this view very strongly and believe that Bitcoin has yet to benefit from a meaningful bear market rally since giving up $48k in March, even if the cycle bottom has not yet come. After a major shareholder was liquidated, I think GBTC stock at a 30% discount is a solid way to go long Bitcoin for a potential rally in spot prices.

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