Capital stopped flowing in, why did Wall Street start abandoning the Grayscale Bitcoin Trust?

There’s a reason the Grayscale Bitcoin Trust (GBTC) has become the benchmark for measuring institutional interest in Bitcoin.

Grayscale is no longer the only option for investors

Grayscale Bitcoin Trust is one of the few products that provides hedge funds, endowments, pension funds and family offices with a way to invest in Bitcoin without requiring users to hold the digital asset themselves.

As a result, capital inflows into GBTC continue to increase. For example, as reported last year, Wall Street investors deposited approximately $18.2 billion in the fund, becoming an indicator of the growing institutional interest in the cryptocurrency industry. Conversely, a decrease in capital inflows reflects institutional withdrawals or profit-taking, such as what has occurred since the first quarter of 2021.

(Note: Profit-taking is also called technical correction, which usually refers to a trading behavior in which the holders of stocks, futures contracts, or options contracts actively change their positions to convert book profits into actual profits after the market value changes and a price that is favorable to them appears.)

On-chain analytics service Skew reported Thursday that GBTC stopped attracting new investments after February 2021. Capital inflows stopped when GBTC began trading at a negative premium to its net asset value (NAV), which represents the underlying market value of the assets held.

As the Grayscale Bitcoin Trust’s premium flipped negative, inflows stopped. Source: Skew
At the beginning of this year, GBTC's premium was as high as 30%. But the latest Skew chart shows that its premium is -11.40%. Prior to this, GBTC's premium relative to its net asset value reached -40.20%, setting a record low.

Meanwhile, GBTC’s premium recovered slightly in early April after Grayscale announced its intention to convert its trust structure into an exchange-traded fund (ETF). Grayscale made this decision as competition from newly launched Bitcoin ETFs in Canada grew, primarily because they offered better expense ratios than Grayscale.

For example, Purpose, the world’s first physically settled Bitcoin ETF, has an expense ratio of 1%. Other Canadian Bitcoin ETFs such as Evolve and CI Galaxy offer expense ratios of 0.75% and 0.40%, respectively. However, Grayscale’s expense ratio is as high as 2%.

In addition, commercial competition with the Canadian Bitcoin ETF may also hinder capital inflows into GBTC. Taking Purpose as an example, the company has received $1 billion in funds per month since its launch in February this year, which indirectly reflects that despite the sharp decline in GBTC's capital inflows, the market demand for Bitcoin investment products is still high.

Musk unsettles Wall Street bitcoin investors

During this period, the spot price of Bitcoin also rose due to Tesla CEO Elon Musk. After Tesla disclosed that it held $1.5 billion worth of BTC on its balance sheet, the cost of buying one Bitcoin climbed from a low of $38,057 on February 8 to a high of $64,899 on April 14, leading investors to believe that more companies would replace some of their cash holdings with Bitcoin.

But during Bitcoin’s February-April price rally, GBTC’s premium remained negative. When Bitcoin began to fall due to profit-taking, China’s cryptocurrency ban, and rumors of Tesla’s Bitcoin sell-off, GBTC’s premium fell to a new all-time low of -40.20%.

Bitcoin correction sentiment accelerated after Musk criticized the cryptocurrency’s carbon footprint. Source: BTC/USD on TradingView

Daniel Martins, founder of independent research firm DM Martins research, stressed that the decline shows that Wall Street's interest in Bitcoin-related investments is waning, especially after the cryptocurrency became the obvious victim of Musk's anti-Bitcoin tweets in mid-May, and Bitcoin's valuation was once halved.

Martins further pointed out that Grayscale reported an annualized return 500% higher than the Nasdaq, but its correction was also worse than the 2008 recession - 82% for the former and 17% for the latter. This makes Grayscale's Bitcoin investment product a "hyper-leveraged bet" with poor risk-adjusted performance.

He also added: "GBTC's volatility is almost 9 times that of the Nasdaq: 145% vs. 17%."

Grayscale ETF coming in 2021?

Martins’ statement highlights the possibility that the GBTC premium could face further downside as investors look for more stable alternatives amid Bitcoin’s ongoing price correction.

In addition, its competition with other digital currency investment alternatives, including cryptocurrency custody services that provide institutional investors with lower fees to hold real cryptocurrency assets, further amplifies the risk of restricted capital inflows.

Grayscale’s transition to ETFs could end its days of charging 2% fees as it competes with an army of ETFs led by Bitwise, Vanguard, Fidelity, Cboe and others, wrote ETF.com analyst Sumit Roy.

“But no matter what happens, GBTC is going to be a force, and no matter how the crypto fund space develops, GBTC is going to continue to exist,” he added.

However, it remains a mystery whether the U.S. market will get a Bitcoin ETF in 2021. The Financial Times reported earlier this week that most ETF applications have been put on hold as SEC Chairman Gary Gensler reiterated concerns about investor protection in the cryptocurrency market.

“I would honestly expect there to be delays on all of our filings,” said Laura Morrison, global head of listings at Cboe.

Original article: https://cointelegraph.com/news/why-is-wall-street-becoming-less-interested-in-grayscale-s-bitcoin-trust

Author:YASHU GOLA