Will the upcoming largest-scale unlocking in Grayscale’s history be the straw that breaks the camel’s back for the bull market dream?

With Grayscale Bitcoin Trust (GBTC) set to unlock its largest bitcoin in mid-July, whether the shares of the multi-billion dollar bitcoin investment fund will be sold off has become the hottest topic in the cryptocurrency circle recently.

What is GBTC Unlock?

Grayscale Bitcoin Trust (GBTC) is the world's largest exchange-traded cryptocurrency fund, owned by Grayscale Investments, LLC, a cryptocurrency asset management company. The investment tool allows individual and institutional investors to participate in Bitcoin trading without having direct exposure to crypto assets. Accredited investors can purchase shares of the fund directly, and GBTC has a lock-up period of 6 months in the secondary market. Currently, a group of shares of the Bitcoin investment fund worth billions of dollars are about to expire and can be traded in the secondary market.

The GBTC fund is very popular among investors because it was once the only open market tool available for trading Bitcoin and was considered the best option other than Bitcoin exchange-traded funds (ETFs), especially as U.S. regulators have been slow to approve numerous Bitcoin ETF applications.

In the early days, due to the lack of competition, GBTC shares often traded at a higher price than the value of Bitcoin in the spot market, which was called the Grayscale premium (as of press time, the GBTC premium was -11.04%).

However, the situation has changed in recent months. Although Bitcoin ETFs have not yet been listed in the United States, other countries such as Canada, Brazil and Dubai already have Bitcoin exchange-traded funds, giving investors more options. GBTC shares began to trade at a significant discount, prompting Grayscale, the largest buyer of Bitcoin, to temporarily stop its purchase of Bitcoin. Under the pressure of fierce market competition, it is reasonable for GBTC to be discounted.

Will GBTC unlocking affect the price of Bitcoin?

In this July unlocking, about 40,000 bitcoins will be unlocked, with a value of nearly $1.5 billion. The largest unlocking will take place on July 18, and this largest unlocking will release 16,240 bitcoins, which is worth more than $550 million at current prices. This batch of shares includes positions locked in the first quarter of 2021, with a value of approximately $530 million, which is also the largest GBTC unlocking event to date.

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

Industry insiders, including analysts at JPMorgan, predict that due to the recent low market sentiment and strong regulatory uncertainty, investors are likely to liquidate their stocks. This large-scale liquidation is likely to bring a "catastrophic" drop in Bitcoin prices.

However, analysts at QCP Capital said in a recent report that the upcoming event will have very little impact on the market. While this will be the largest single-day unlocking of GBTC shares this year, it is not the first such event for Grayscale. QCP noted in its report that "most of the large institutional positions that were previously subscribed in kind have been unlocked in advance, and they will not choose to sell at the current discounted price for the time being."

QCP analysts added in the report, "What is about to be unlocked are institutional holders who subscribed directly to GBTC 6 months ago, including all new Q1/2021 positions, among which the main force is ARK Fund."

This is the position of GBTC institutional investors given by QCP Capital. It explains the new positions of these investment funds in the first quarter/final quarter of 2021.

In this image, we can notice that BlockFi has sold half of its position, which was obtained via SEC reporting in Q4 2020.

BlockFi's model is based on arbitrage of GBTC, and when it is sold, it is expected to repurchase Bitcoin from the spot exchange and repay the interest in the investment account. In fact, there are many funds in the market trying to use the huge premium of GBTC for arbitrage transactions, and they have also made relevant hedging preparations to face the extreme situation of Bitcoin's collapse during the 6-month unlocking period.

After the last unlocking event in the first quarter, GBTC shares began to trade at a discount to the spot price, which forced large shareholders to stop selling, perhaps waiting for GBTC to start trading at a premium again. Therefore, QCP analysts do not believe that the upcoming unlocking will have a significant impact on the market price outside of GBTC.

In summary, although JPMorgan Chase gave a less optimistic analysis, it did not comprehensively consider the market behavior after the GBTC unlocking. If it simply considers liquidity, the result may indeed be a short-term decline, but only short-term. The buying pressure in the "spot" market may increase significantly due to the price drop, and the price of Bitcoin will eventually increase.