Grayscale’s largest unlocking wave in history is coming. Will the market go bullish or bearish?

Today, Grayscale ushered in the largest single-day unlocking of Bitcoin in history, unlocking approximately 16,240 BTC. In total, approximately 41,000 BTC worth of GBTC will be unlocked in July, estimated at nearly $1.4 billion.

Get closer to GBTC unlock and find out

GBTC stands for Grayscale Bitcoin Trust, the world's largest Bitcoin trading crypto fund owned by Grayscale Investments, a cryptocurrency asset management company. The investment tool allows individual and institutional investors to participate in Bitcoin trading without having to directly touch crypto assets.

Accredited investors can purchase shares of the fund directly in the form of Bitcoin or U.S. dollar payments, and GBTC has a lock-up period of 6 months in the secondary market. Investors can only sell their GBTC shares to other parties after the six-month lock-up period.

Since its establishment, the GBTC fund has been very popular among investors, generating a premium of more than 40% at one point. Before February of this year, it was the only open market tool available for trading Bitcoin and was considered the best option other than the Bitcoin ETF.

Due to the lack of alternatives, GBTC shares often trade at a premium to the value of Bitcoin on the spot market. However, the situation has changed in recent months, and GBTC shares have begun trading at a significant discount, so Grayscale, the largest buyer of Bitcoin, stopped buying more Bitcoin.

How is this GBTC unlocking different from previous ones?

This is not the first time that the market has encountered such a large amount of GBTC unlocking. Since the end of last year, that is, after the start of this round of bull market, about 10,000 Grayscale GBTC unlocking has occurred several times.

In February 2021, GBTC shares worth 20,000 bitcoins (nearly $700 million) were unlocked. In the months after GBTC was last unlocked, BTC fell significantly.

As shown in the figure above, there were several large-scale unlockings in about three relatively concentrated periods of time. Since April this year, Grayscale unlocking has entered a small climax until it reached its peak on June 21.

Among the five large unlockings marked in the figure, there were two cases where Bitcoin experienced a relatively obvious short-term decline after unlocking, and then rebounded. On March 24, after 10,300 Bitcoins were unlocked, Bitcoin fell by as much as 4.6% within 72 hours. On June 21, after 12,300 Bitcoins were unlocked, Bitcoin fell by as much as 5.8% within 72 hours.

This fluctuation is not drastic. In the five recent large-scale unlockings, there was no significant decline in three of them. The decline after the unlocking on June 21 was the largest. Therefore, can we assert that there is a large correlation between the large-scale unlocking of Grayscale Trust and the Bitcoin market?

Since Grayscale suspended new investments in March this year, the GBTC premium has turned negative, falling below -20% in May and currently remaining at around -10%. Although Grayscale's previous unlocking did not cause drastic fluctuations in the market, this unlocking is significantly different from the previous ones. This is the largest single-day unlocking under the background of Grayscale's negative premium.

What impact does the unlocking of GBTC have on the market?

Once unlocked, investors can choose to liquidate their shares at the current market price, or hold them and sell them later. If they choose to sell, it could put downward pressure on Bitcoin prices and GBTC.

Bitcoin is approaching its lowest weekly close in over a month, trading just above $31,400. This week, BTC has been steadily moving downward, losing 6% while trading in a relatively tight range. Selling pressure could push BTC prices further below $30,000.

Not only has Bitcoin failed to break the $33,000 resistance level, but it is also struggling to stay above $32,000. It is currently trading above its immediate support level near $30,960. Failure to sustain this level will see it head towards the next support level around $30,030.

When GBTC unlocks, bearish price expectations will force companies that already hold it to sell and lead to a prolonged Bitcoin pullback. Since there are no real signs of demand recovery in the short term, the probability of Grayscale increasing its holdings again is very low.

Many believe that the GBTC unlocking puts pressure on the spot market in the short term. However, it is worth noting that Grayscale will not sell its BTC when the equities expire.

Investors buy Bitcoin in order to deposit it in the GBTC fund and receive shares against their BTC deposits, in a way that ensures that the Bitcoin held by GBTC never leaves the 2% management fee collected by Grayscale.

The unlocking of these shares remains bearish in the short term as GBTC’s premium tends to be negative during the sell-off period, so investors are more motivated to buy GBTC shares than to buy Bitcoin.

GBTC’s premium is currently -11.25%, meaning that after selling the shares on the spot market, traders can buy them again at a discount of 11% to the BTC spot price.

GBTC's premium plays a key role in the six-month holding period, where institutional buyers want to sell at a premium to the purchase price. GBTC was in a positive premium range for most of the first quarter, but turned to a negative premium range after April.

Although Grayscale's premium is currently negative, some analysts believe that this does not mean that the enthusiasm of institutional investors has declined.

Amber Group wrote on Twitter that much of the bearish talk surrounding GBTC unlocking ignores the BTC spot purchases brought about by short positions being closed.

The massive unlocking could lead to a massive sell-off of GBTC on the open market. But it could actually create buying pressure on Bitcoin, rather than selling pressure, because those who sold GBTC would have to buy back Bitcoin to close out their short positions on the trade.

FTX CEO Sam Bankman-Fried tweeted that the unlocking of GBTC was sold on the secondary market and was “not material” to Bitcoin.

Even if the price of Bitcoin falls after the Grayscale Bitcoin Trust is unlocked, it should only last for a short time. After all, after the unlocking, all GBTC shares can be traded on the US over-the-counter market OTCQX.

With the unlocking of GBTC, will the sideways fluctuation of Bitcoin that has lasted for nearly two months change? Let us wait and see.