GBTC negative premium rises to a record high, is another crash coming?

GBTC's negative premium reached an all-time high of 46%.

Source: Financial Times

Compilation: The Way of DeFi

Following the FTX collapse, focus turned to the Grayscale Bitcoin Trust (GBTC), which is currently trading at an all-time high of 46%, meaning that investors in the trust have lost 83% since Bitcoin peaked in November 2021, exceeding the 74% drop in the value of Bitcoin itself.

What is Grayscale?

Grayscale owns the world's largest Bitcoin Trust Fund, GBTC, which allows investors to obtain Bitcoin.

Investors can gain exposure to Bitcoin without purchasing the currency itself.

Similar to the SPDR Gold Trust, GBTC derives its value from actual $BTC held and is publicly traded on OTCQX.

Grayscale Holdings:

1. Holding 673,000 BTC, 3.5% of all available #BTC. GBTC is currently valued at $10.6B, compared to $13.5B 2 weeks ago.

2. 3 million ETH, currently worth $3.6 billion, compared to $4.8 billion two weeks ago

3. Holding 106,000 coins is currently worth $1.4 million vs $3.9 million

• 2018 bear market: GBTC plunged 90.5% in 13 months before hitting bottom.

• 2022 Bear Market: Currently #GBTC is down 85% and still in a major downtrend.

The implosion of cryptocurrency exchange FTX has eroded confidence in digital assets, with repercussions rippled across a nearly $1 trillion industry riven by complex and often opaque connections between major players.

Concerns about Grayscale grew after Genesis Trading, a cryptocurrency broker that originated more than $50 billion in loans last year, announced last Wednesday that it was suspending redemptions and loan issuance at its lending arm.

Both Grayscale and Genesis are subsidiaries of Digital Currency Group (DCG), a venture capital firm based in Stamford, Connecticut, USA.

Genesis was an authorized participant of GBTC and was responsible for issuing new shares until Grayscale launched its in-house broker-dealer Grayscale Securities last month.

DCG is also GBTC’s largest shareholder, with a 4.1% stake, or 28.2 million shares, according to Refinitiv data.

The core problem facing GBTC is that it has been superseded by the emergence of better vehicles for holding Bitcoin.

When it was launched as a private placement in 2013, it was one of the few products of its kind, and as the crypto industry expanded, it quickly increased the number of shares to absorb the incoming wave of cash.

However, it was disrupted by the emergence of Canada’s first Bitcoin exchange-traded fund in 2021. These investment vehicles typically charge less than half the 2% per year that GBTC charges. They also offer greater liquidity without new investors having to pay a premium.

As funds flow out of GBTC, the supply and demand of its shares become unbalanced, pushing its share price significantly below its net asset value.

The fundamental problem is that – unlike an ETF – GBTC has no arbitrage mechanism to bring supply and demand back into balance.

GBTC shares cannot be redeemed for physical Bitcoin or cash and can only be sold to other buyers through the over-the-counter market. Grayscale needs regulatory approval to implement the stock repurchase plan.

Grayscale instead wants to convert GBTC into a “spot” Bitcoin ETF, holding “physical” currency. Those plans have so far been blocked by the U.S. Securities and Exchange Commission (SEC), which has refused to follow regulators in Canada and elsewhere in approving a spot Bitcoin ETF, citing concerns about potential fraud and manipulation on the unregulated exchanges where trading occurs.

Grayscale, which declined to comment for this story, is currently suing the SEC for the right to convert GBTC. However, the widening negative premium on GBTC suggests that few market participants think it has a chance of success.

“If they are successful in their lawsuit, then any investor will be left intact. The discount will be dramatically reduced because the [stock] creation and redemption process can happen freely,” said Todd Rosenbluth, director of research at VettaFi.

“The structure of GBTC is clearly suboptimal because shares cannot be redeemed,” said Nate Geraci, president of The ETF Store.

“It is extremely disappointing that the SEC continues to allow any retail investor to use this fund, but they will not approve a spot Bitcoin ETF that would solve the discount problem. This is yet another example of the ridiculous regulatory dysfunction that currently exists throughout the crypto ecosystem,” Geraci added.

Some investors are keeping their faith. Ark Investment Management, already GBTC’s third-largest shareholder with a nearly 1% stake, bought another $2.8 million in shares this week.

In October, Ark CEO Cathie Wood said GBTC was trading at a “fire sale” price given the possibility that it could be converted into an ETF at some point. Ark is also seeking permission to launch a spot ETF but said it would not comment on day-to-day trading activity.

The second-largest shareholder, with a 2.9% stake, is BlockFi, a cryptocurrency lending and trading platform that has stopped taking customer deposits due to its “significant exposure” to FTX.

Peter Tchir, head of macro strategy at Academy Securities, raised the prospect of Grayscale seeking permission to buy back large amounts of stock and then liquidate the fund, potentially earning enough profit to offset the loss of its fee income and attracting outside investors in the process.

However, Geraci believes that GBTC’s negative premium has the potential to widen further, “especially if the FTX meltdown spreads further into the entire crypto space.”

Still, he believes GBTC is “clearly a better option than holding Bitcoin on an exchange like FTX because investors can do so with confidence that the underlying Bitcoin actually exists.”

Additionally, Geraci believes that the FTX collapse strengthens the case for regulating cryptocurrency exchanges, “theoretically accelerating the timeline for the approval of a spot Bitcoin ETF.”

However, Rosenbluth believes the SEC will view this fiasco as vindication of its position.

“The SEC sees spot Bitcoin as risky and is concerned about fraud and manipulation. I’m not sure they are surprised by these developments.”