Grayscale’s Bitcoin Trust (GBTC) hit the headlines again yesterday with a record 16,244 Bitcoin per day, adding to its stack of over 630,000 Bitcoin and assets under management (AUM) totaling around $ 23 billion. Obviously, business is going well. So who are Grayscale’s investors? Is GBTC’s Premium an Incentive or a Disadvantage? And where will this fund move in the future?
What is GBTC?
Grayscale owns Bitcoin in its GBTC trust and investors are buying stocks representing a number of these Bitcoin. In addition to a “premium”, an administration fee of 2 percent per year is charged. The premium is the difference between the underlying Bitcoin value (native asset or “NAV”) and the market price of the stocks (what the stocks cost).
There are two layers of investors. There are grassroots investors – accredited investors who have been selected to participate in the Fund’s private placement at the “NAV” price, also known as the price of underlying Bitcoin. Basic investors can send USD or Bitcoin and receive a number of shares equal to the Bitcoin value (currently 0.00094919 BTC / share).
Another important catch is that it’s a possibility. Once you’ve added Bitcoin to the trust, it cannot be taken out. Investors can sell their stocks, but the bitcoin remains in trust and out of the market.
“Grayscale Bitcoin Trust does not currently operate a redemption program and may stop creating it from time to time. There can be no guarantee that the value of the shares will approximate the value of the bitcoin held by the trust, and the shares can trade at a substantial premium above or at a discount to the value of the trust’s bitcoin. The trust may, but is not required to, obtain regulatory approval to conduct a redemption program. “
Fine print from the Grayscale website
Basic investors have a six-month lock-up period before they can sell their shares on the open market to the second tier of investors. These secondary investors will have to pay the higher market price for the shares. Again, the “premium” is the difference between the price of open market shares and the underlying Bitcoin-priced shares.
How are Grayscale investors doing?
The largest investor is Three Arrows Capital, which recently increased a position from $ 259 million to $ 1.4 billion (approximately 6 percent of the trust). It is one of the investors taking advantage of recent trading by stepping into the base tier of the fund as a private placement.
By investing at the net asset value in the base layer, the shares are blocked for six months. They can then sell the shares at the higher market price and secure the premium. The premium historically remains around 20 percent but can pump in a bull market with high demand for stocks. For example, it was over 40 percent in December 2020.
Another investor taking advantage of this? BlockFi, which owns around 5 percent of the shares in the trust. Blockfi gives you about a 6 percent return on lending your bitcoin to them as they can then lend your bitcoin to groups like the Grayscale Trust. In this case, it lends Grayscale the bitcoin and gets into the fund, where it can use the premium.
For second tier investors buying stocks in the open market, the premium is an increased risk. When Bitcoin drops sharply, the losses are higher as the net asset value (Bitcoin price) drops and the premium purchased drops. If you buy before a bull market and a premium pump to match, your profits can be higher as well.
Why the premium? It’s the gap in the market between supply and demand. The demand for shares exceeds supply as new shares are created continuously, but these are delayed due to the six-month block. Conversely, ETFs keep the premiums in check, as new shares can also be created continuously, but these are not blocked and can be traded immediately. Bonuses can be thrown away.
Is the premium worth it?
Why do smaller secondary investors accept this GBTC premium risk over a pure Bitcoin purchase?
For one, you can just buy it using your traditional brokerage account. Second, avoid custody. Third, there are tax benefits as it is IRA eligible. And fourth, if you think a bull run is imminent, you can take advantage of a premium pump.
Accredited investors obviously have a strong premium incentive to participate in the private placement, but it’s more than that. For some institutional investors, GBTC is one of the few ways to get Bitcoin exposure. Many mutual funds have charters that restrict direct cryptocurrency investments and / or they don’t want Bitcoin to be painstakingly custody. Basically, however, anyone can invest in publicly traded assets like GBTC to get the best of both worlds. Your internal regulations allow this and you avoid having to keep yourself safe.
However, this won’t last forever. As the market matures and there are more ways to trade Bitcoin in a public market (like a Bitcoin ETF) there will be fewer secondary investors willing to pay the premium and it will fall to meet the lower demand to satisfy. If so, GBTC will likely cut its above-average 2 percent management fee and convert the file into an ETF.
Overall, the GBTC premium appears in the secondary market and offers a very attractive trade for accredited investors who are able to join the private placement and invest based on the fund at the net asset value of Bitcoin. However, this premium will gradually go away as the market matures and more options for trading Bitcoin in the public market emerge.
This is a guest post by Ellie Frost. The opinions expressed are solely their own and do not necessarily reflect those of BTC Inc or Bitcoin Magazine.