When will the impact of Grayscale's continuous selling pressure and the "Bitcoin Pixiu" end?

Since its inception, Grayscale has been an important representative of buying institutions in the crypto world and one of the largest crypto "open whales". For many years, it has been providing investors with compliant cryptocurrency investment channels in the form of trust funds.

However, after the Grayscale GBTC Trust was successfully converted into a spot Bitcoin ETF on January 11, it began to cause sustained selling pressure on BTC. As of the time of writing, GBTC has seen a cumulative outflow of US$3.45 billion, and except for GBTC, the other 10 ETFs are in a net inflow state.

This means that Grayscale GBTC is the core factor causing the overall capital outflow of Bitcoin ETF at present, becoming the largest selling pressure in the short term .

Grayscale: The (Once) Largest Crypto “Whale”

Since 2019, Grayscale has been an important and prominent whale in the crypto world. As a subsidiary of Digital Currency Group (DCG) established in 2013, before the spot Bitcoin ETF was listed and traded, Grayscale has been providing investors with compliant investment channels in the form of trust funds, and more than 90% of its funds come from institutional investors and retirement funds.

When GBTC was converted to an ETF on January 11 this year, Grayscale GBTC's assets under management (AUM) reached US$25 billion, making it the largest cryptocurrency custodian.

Currently, Grayscale’s single trust fund also includes ETH, BCH, LTC, XLM, ETC, ZEC, ZEN, SOL, BAT, etc. It can be seen that Grayscale, as a "friend of institutions", has a very stable investment preference, which is basically mainstream assets and old currencies.

Moreover, these trusts themselves are "naked long trusts", just like "Pi Xiu" that feeds specifically on cryptocurrencies - they only go in and not out in the short term.

If investors choose to deposit BTC and ETH for arbitrage purposes, it will not only lead to the continuous growth of the corresponding trust scale of Grayscale, but it will also be absolutely beneficial to the spot market - strongly buying the corresponding currencies from the supply side to buffer the selling pressure.

Therefore, although Grayscale's GBTC has become a much-criticized bear market trigger, it was once considered the main engine of the bull market (2020):

Before 2020, Bitcoin ETF has always been the main channel for incremental OTC funds to enter the market. Everyone expects Bitcoin ETF to bring in huge amounts of incremental funds, open up the way for traditional mainstream investors to invest in cryptocurrencies, and promote Bitcoin and other assets to be accepted on a large scale by Wall Street as much as possible, so that the allocation of encrypted assets can be more widely recognized.

Since institutions represented by Grayscale entered the market in 2020, they have also taken on everyone's expectations for Bitcoin ETFs, and even played the role of a bull market engine for a time.

Especially in the context of the long-delayed approval of Bitcoin ETF applications, Grayscale has established itself as the almost only compliant entry channel, making a fortune in silence:

In fact, it acts as an intermediate channel for qualified investors and institutions to intervene in the Crypto market, realizes the weak connection between investors and ETH spot, and opens up a channel for incremental off-market funds to enter the market directly.

Negative premium gradually eliminated

In fact , as early as June 2023, after the news about BlackRock's spot Bitcoin ETF came out, the negative premium of GBTC began to gradually narrow .

Taking the Coinglass data on July 1, 2023 as an example, the negative premiums of Grayscale's GBTC, ETHE and other trust products are almost at a historical low - the negative premium of GBTC Trust is 30%, ETHE is also as high as 30%, and the negative premium of ETC Trust has reached an outrageous level of more than 50%.

In the ETF expectation game over the past six months, the negative premium of GBTC has narrowed all the way, from 30% to close to 0 today. Most of the funds that were bought in advance have reached the time to exit with profits (such as Cathie Wood).

From the perspective of negative premium, this is very harmful to investors who have participated in the private placement of GBTC and ETHE Trust in the primary market in cash or BTC, ETH, because the Grayscale Cryptocurrency Trust cannot directly redeem its underlying assets - there is no clear exit mechanism, and there is no redemption or reduction of holdings.

Then after 6 or 12 months (the unlocking period of GBTC and ETHE), these investors will sell the unlocked BTCG and ETHE shares in the secondary market of US stocks, and they can only suffer losses based on the current negative premium.

From this perspective, some people also bought a large amount of GBTC in the secondary market because of the negative premium. BlockFi once provided a loan of about US$1 billion to Three Arrows Capital, with the collateral being two-thirds of Bitcoin and one-third of GBTC.

As a major buyer of GBTC, Three Arrows Capital is most likely betting that the negative premium will be evened out after GBTC becomes an ETF or is open for exchange in the future, so that it can obtain the profit difference during the period.

Therefore, long before this round of ETF application boom, Grayscale had already actively promoted GBTC, ETHE and other trust products to become ETFs, in order to open up the channels of funds and exchange, equalize the negative premium, and explain to investors. Unfortunately, Three Arrows Capital did not wait for this day.

When will the impact of grayscale end?

What was honey then may be poison today. After Grayscale's GBTC Trust was successfully converted into a spot ETF on January 11, it began to cause continuous BTC selling pressure:

As of the time of writing, GBTC has once again seen a single-day outflow of more than $640 million, the largest single-day outflow to date. After being converted to ETFs, a total of $3.45 billion has flowed out. Except for GBTC, the other 10 ETFs are all in a net inflow state.

In particular, as of January 23, the total trading volume of all spot Bitcoin ETFs in the first seven trading days was approximately US$19 billion, and GBTC accounted for more than half of it. This also means that the incremental funds currently brought by ETFs are still in the stage of hedging the selling pressure of GBTC's continued capital outflow.

Of course, the sell-off by FTX, which is in the process of bankruptcy, also accounted for a large part of it - the 22 million shares of GBTC sold by FTX were worth nearly $1 billion.

In general, although Grayscale and GBTC were one of the biggest engines in the last bull market and have been providing investors with compliant cryptocurrency investment channels in the form of trust funds for many years, after the ETF was approved, there were traces of capital outflow and selling pressure on GBTC:

GBTC's 1.5% management fee is much higher than other funds' fee range of 0.2%-0.9% .

To some extent, this will be an open game in the next period of time: GBTC currently still holds more than 500,000 BTC (about 20 billion US dollars), and institutions and funds waiting to enter the market will definitely wait for the right time to collect chips and erode their market share.

This also means that for some time to come, the selling pressure of GBTC may still overwhelm the subjective willingness of funds to flow in.

Looking back now, Grayscale and other companies that were once regarded as the "bull market engine" to attract incremental off-market funds in 2020 not only no longer work under the current environment, but have even become potential risk points that may trigger an industry tsunami at any time.

Positive factors will be magnified when the wind is favorable, and only persistence during the ebb tide is more valuable. For an industry that is still in rapid development, breaking the obsession with the layout of giant whales and dispelling the charm of institutions may be one of the greatest experiences we can gain in this special cycle.