In-depth analysis of the "Grayscale Effect": How does Grayscale drive Bitcoin's rise?

Original title: "In-depth丨How does Grayscale drive BTC up?"
By Ben Lilly
Translation: Miko

What started as a single tip turned into a flood of signals that the spot market was driving the entire market. Not the derivatives market. The last time we saw this was in 2017. As the tips continued to go off over the next few weeks, it became clear that Bitcoin wasn’t just heating up, the entire market was. The reality of the macro market shift had settled and we had accepted that the bull run wasn’t something to question, it had already happened. The only thing that was hard to understand was where the spot buying was coming from .

The noise of market signals shows the entry of a new species. This is their first entry into the blockchain, and without considering the price. In the news in October, Grayscale experienced an inflow of $300 million in one day. The new species is Wall Street. Now that we have determined who the new species is, we should take action and start digging into the data of spot buying and specific information about Grayscale.

The tools we have at our disposal are 8-k reports, 10k, 13G quarterly reports, a mobile phone, and Jarvis AI, our AI machine that tracks real-time blockchain data from multiple networks. We use it to help manage 32 algorithms, minimize risk, pinpoint timing, and generate signals. Jarvis AI uses all of this to autonomously trade spot, futures, perpetual futures, and options.

So when it comes to Grayscale, we wanted to see what was foreshadowing Jarvis AI before the price started its parabolic rise and the spot market heated up. The first thing was to figure out how Grayscale operates. Once we started working on it, what we found was that they are the biggest driving force in the crypto space . And their impact on the market also creates one of the best trading opportunities, which I will analyze for you today.

Grayscale Advance and Retreat

Overall, Grayscale is a company under the Digital Currency Group that has cornered the market, accumulating 606,000 BTC to date. It is essentially structured to hoard Bitcoin . BTC and USD (which are then used to buy BTC) flow in, and nothing comes out. The way Grayscale achieves this one-way flow is the way they distribute shares. Accredited investors or "wealthy individuals" can sign up for a private placement to receive shares. These accredited investors will then hand over BTC or USD to Grayscale. In exchange, Grayscale will give them shares of equal value. If each share is equal to 0.001 BTC (actually 0.00095085), then for every BTC handed over to Grayscale, the accredited investor will receive 1,000 GBTC shares (minus a small fee).

The key is that private investors have to wait six months before they can sell their shares on the market. This is where non-accredited retail investors, or “less wealthy” buyers, come in. Now, exchanging shares for BTC may seem fair, but in reality, it is not.

This is because GBTC almost always trades at a premium. Non-accredited or retail investors seeking pure access to BTC within the stock market have to pay other fees in addition to fair value. To explain this premium in numbers, GBTC closed at $28.25. According to the BraveNewCoin index, Bitcoin closed at $22,830. According to the Grayscale website, each GBTC is equivalent to 0.00095085 BTC. This means that the fair value of GBTC is $21.71. The current price represents a 30% premium, just because the buyer is not rich. This 30% premium goes directly to the accredited investor who handed over the BTC .

This strategy is how Grayscale created the trust, and Bitcoin is basically a one-way flow, into the trust. What accredited investor with Bitcoin wouldn’t be interested in the growth of their Bitcoin balance? It doesn’t matter if the price is $5,000 or $20,000. As long as there is a premium, the value in BTC will grow.

In half a year, it is almost a risk-free 30% return. In a year, if every 6 months is a 30% return.

A 30% return is pretty amazing and natural economic pressures should drive this premium down to 0%. However, for some reason we just haven’t seen that happen yet, and it’s because of the way it works and the lack of alternatives. But don’t let this bother you… let me show you how to take advantage of this.

effect

Before we get into the details, let's first analyze what "effect" is.

Funds flow into the Grayscale Trust Fund, and investors who provide capital inflows receive GBTC shares in return. These shares are locked for 6 months. When the shares are unlocked, investors participating in the arbitrage process will buy BTC for the next six-month cycle in the spot market.

That’s what we’re here to hint at. When the biggest buyers enter the market. Now, because these investors are price agnostic, meaning they care more about the amount of Bitcoin in their account than the amount of USD, they don’t care too much about what the spot price is. We also know this because most of the funding Grayscale receives (70-80%) is in so-called “like-for-like trades,” meaning it’s in BTC and not USD. This effect drives the spot market, and by using tools like derivatives, traders can essentially ride on this market dynamic.

Facts prove

I found the easiest way to explain the Grayscale effect is to break down the periods of high fund inflows and look at the spot market price action of Bitcoin shortly after the shares unlock. To better understand this, I have divided the high inflow periods into 10 tiers. I will explain them one by one. So first, tiers 1 and 2.

The chart below shows two periods where the fund saw large dives. Period 2 appears to have occurred after a brief period of no inflows. Think of these “flat” periods as moments when Grayscale was not accepting new investors.

The two convertible bonds are set to be unlocked twelve months later, around February 16, 2019 and April 13, 2019. Yes, twelve months. The six-month lock-up period will not come until January 2020.

The average asset premium in the first two weeks of each unlock period is now 18.8% and 23.9%. These figures represent the premium of GBTC on the total amount of BTC held by the trust. If there is $100 million in assets in the trust, it means that the shares are trading as if the trust is worth $118.8 million or $123.9 million.

When the premium is 0%, buyers of GBTC receive fair value for the trust's holdings and the incentive to "rinse and repeat" is gone. So as long as this premium exists, the "effect" will work . Now, where things get interesting is after each unlocking event. You can see that BTC moves noticeably each time. Here are the prices shortly after the first two tranches unlocked.

Now, after two events, it can be said to be a fluke. And the first major unlock occurred when Bitcoin bottomed out from its December 2017 high, which can also be said to be a huge coincidence (note: that was not the first unlock, just the most important one up to that point). So, to find out if this was a fluke, let's continue reading.

The analysis of the third and fourth batches is continuing.

The 3rd tranche unlocked on June 9 and June 16, 2019. Remember, the 6-month lockup period will not change until 2020. The average premium on GBTC shares in the week before the 3rd tranche unlocked was 26.4%. Therefore, the momentum for the next lockup remains.

Below is the spot market during this period.

Remember, Bitcoin can be $5,000 or $50,000, and the rate of return in BTC will not change. The point is to grow the portfolio in terms of the number of Bitcoins. As long as the premium exists, investors will increase their holdings .

Now back to the low point of the convertible bond, the 5th and 6th tranches are unique in that the unlocking occurs when the trust company switches from a 12-month lockup period to only a 6-month lockup period. The rule change occurred on January 21, 2020, and it takes 90 days to take effect. I'm not sure if this applies to shares that are already within the unlocking time limit, or only to newly issued shares. I'll show you in a moment, but my intuition says that it does not apply to shares that are already on hold.

Here are tranches 5 and 6. As you can see, tranche 6 more than doubled the inflows into the trust.

For the 5th batch, the 12-month period ends on April 14-28, 2020. For the 5th batch, it will most likely be July 14, 2020. But again, because of the rule changes, this may be a little different. However, the graph seems to suggest that it is 12 months.

Here’s the chart, so you know what I mean.

As you can see, this is a repeatable pattern forming. But it gets better. The rule change happened on January 21st, so the rest of the convertibles are all on a 6 month lockup period.

The seventh batch finally fell on July 20 and July 27. This overlapped with the sixth batch in terms of premium. No further coverage was required. The eighth batch was complete, with a continuous inflow period from April 27, 2020 to June 29, 2020.

The various unlocking activities started on October 27, 2020, and lasted until December 29, a total of 9 weeks. I chose the first half of October to see how much the premium was before. This period was good enough before the shares were unlocked. The average level in the first half of the year was 11.2%. Therefore, the above cycle is in effect, promoting spot purchases.

You know what happened, the market exploded.

What is clear is that these unlocking events coincided with a significant move higher in price. Now for those wondering what this means for the GBTC premium and what it looks like when new shares are unloaded in this market. Here is a quick chart summarizing the unlocking of GBTC shares.

Note the indicator in the bottom third of the chart, that is the premium. It will drop every time the stock is unlocked. So if you want to play GBTC, buy it a week before the unlocking and sell it when it is unlocked.

Now, it is important to know that once these higher prices and premiums are realized after the unlock, the price will continue to consolidate. This leaves the premium to shrink again before the next unlock event.

We last saw the largest buyers in the market exit during the week of January 11. This effect tends to last about a week or two after the unlock, which also supports the January 11 date.

When we combine this information with the data from Jarvis and his spot purchases and tag wallets, it is clear that Grayscale is driving the market . There is nothing more important for you to pay attention to. Even Three Arrow Capital has joined the game, as they have announced twice that they are participating in this cycle. Don't be discouraged, there are many benefits to participating in this game, just take advantage of this ride.

discuss

The next big unlock will be around February 3, 2021. This means that there will be a gap in the unlock period before then. This gap will allow the market to cool down. This is what we are currently seeing in the week of January 11. After February 3, we can expect more spot buying. But to be honest, I am looking forward to the next round of large inflows like the one in October.

However, remember that this effect will exist as long as the premium exists. If an ETF is launched, you should pay close attention. If the premium disappears, this effect will most likely disappear as well.