Grayscale unlocks a large amount of GBTC within two weeks. Will Bitcoin fall below $30,000?

Whether shares of multi-billion-dollar Bitcoin (BTC) investment funds will be sold off, causing the cryptocurrency’s spot price to plummet, has become a hotly debated topic among industry analysts.

Grayscale GBTC premium has been negative for several months

The focus of the debate is Grayscale Bitcoin Trust, the world's largest digital asset management company that allows institutional investors to gain indirect exposure to the Bitcoin market through its product GBTC. Investors can purchase GBTC shares directly through Grayscale in the form of Bitcoin or U.S. dollar payments.

However, investors can only sell their GBTC shares to other parties on the secondary market after a six-month lock-up period, so they are expected to liquidate at a premium if the market price at the time of sale exceeds the net asset value (NAV).

On the other hand, liquidating GBTC shares when the market price is below the NAV will result in losses. Therefore, if investors decide to sell their GBTC holdings, they will have to do so to avoid financial losses. This is because the stock has been trading at a discount, that is, below its NAV, since February 24, 2021.

GBTC premium has been negative for months Source: ByBt.com

Some analysts, including JPMorgan strategists, believe that accredited investors will sell at least a portion of their GBTC holdings after the July unlocking period, further depressing the current downtrend in the Bitcoin market.

“Despite this week’s pullback, we remain resistant to abandoning our negative outlook on Bitcoin and crypto markets more generally. As such, despite the improvement, our signals remain generally bearish,” Nikolas Panigirtzoglou, chief strategist at JPMorgan, said in a note to clients.

However, other analysts believe that this event will cause sellers to exit the market in large numbers in July, bringing volatility and bullishness, which may prompt Bitcoin to break new historical highs.

Is Bitcoin price correlated with Grayscale unlock date?

Panigirtzoglou explained that in December 2020, investors bought GBTC shares at a premium of about 40%, and the Grayscale Bitcoin Trust attracted $2 billion in inflows, followed by $1.7 billion in January.

This means that there are about 140,000 Bitcoin stocks that will be unlocked by the end of July. About 139,000 Bitcoins have been released from mid-April to mid-June, which coincides with the BTC/USD spot price plummeting from $65,000 to a low of $28,800.

Lyn Alden, founder of Lyn Alden Investment Strategy, noticed a correlation between the plunge in spot Bitcoin prices and Grayscale’s GBTC unlocking period, noting that the same could happen as more shares unlock in July.

Grayscale Bitcoin Trust unlock date Source: Bybt.com

Alden suggested that the correlation suggests Grayscale’s “neutral carry trade” is slowing down.

In the arbitrage trade, institutional investors (such as hedge funds) borrow Bitcoin to buy GBTC shares. Then, after the lock-up period expires, these investors sell GBTC shares to retail investors in the secondary market, usually at a premium. They then return the borrowed Bitcoin to the lender and pocket the difference.

“Part of the reason for Bitcoin’s rally in the second half of 2020 was the Grayscale neutral carry trade, which absorbed a lot of Bitcoin,” Alden added. “When the Bitcoin ETF and other new ways to access Bitcoin made GBTC less unique, the premium disappeared, so did the neutral carry trade.”

Grayscale Investments stopped selling GBTC shares after February 2021. Source: ByBt.com

However, according to David Lifchitz, chief investment officer at ExoAlpha, arbitrage strategies may have contributed to the drop in Bitcoin prices, but they did not cause the crash.

Lifchitz pointed out that the real GBTC arbitrage trading strategy is for investors with deep pockets. This is because they need to hold a short position in Bitcoin during the GBTC lock-up period - the overtime costs may offset the price difference brought by the arbitrage.

“For a simple buyer who purchased GBTC shares at a discount and is not short Bitcoin, their profit is based on the price they purchased GBTC at. If they bought between $40,000 and $60,000, they are at a loss today... and therefore may not want to sell to lock in their losses,” he said.

In this regard, Grayscale CEO Michael Sonnenshein told Barron's, a top US financial website, that investors who buy GBTC shares will consider the medium- and long-term prospects. Therefore, they may not want to sell their holdings immediately after unlocking.

Sonnenshein added: “I would generally say that investors would certainly look at the price of the stock, relative to net asset value or relative to Bitcoin, before they think about getting any liquidity.”