Below is an excerpt from a recent release of Deep Dive, Bitcoin MagazinePremium Markets Newsletter. To be among the first to receive these and other on-chain Bitcoin market insights straight to your inbox, subscribe now.
Grayscale’s story is very well known at this point. It is an open-ended trust that has resolved the scandalous regulations of the US Securities and Exchange Commission (SEC) and found a way to offer Bitcoin to institutional capital and brokerage accounts before almost anyone else.
You must give credit when credit is due: The GBTC product has been a huge success for Grayscale. The trust currently holds a staggering 651,884 bitcoins, or about 3.10% of all bitcoins that will ever exist.
During the subsequent months of 2020, GBTC shares traded at a significant premium due to the trust structure.
With the shares trading at a high premium, accredited and institutional investors could acquire GBTC shares in NAV (Net Asset Value), but these shares had to be closed for six months before they could access the secondary markets.
Investors piled into the trade as the seemingly risk-free arbitrage was too tempting to miss.
From June 18, 2020 to February 18, 2021, Graycale bought an amazing 284,393 bitcoins. For context, this equates to 127% of bitcoins mined over the same period.
However, on February 18, 2021, GBTC shares began trading at a discount to the NAV and, as expected, new redemptions of GBTC shares stopped completely. With one of the market’s biggest buyers sidelined, bitcoin has lost ground, but there’s more to the story.
All the GBTC shares that were redeemed and held for six months started hitting the market in waves, and this led to an unexpected development in the market.
While it was on its way up, with the premium, Grayscale was gaining bitcoin while retail investors were bidding on GBTC stock prices in the secondary market, all those stocks now trading at a discount from NAV have definitely gone out of demand for select bitcoin for the time being.
In just over the past seven days, 11,512 BTC equivalents of GBTC shares have been opened, and some of these have undoubtedly been sold out in the market. As an institutional setter, if you want exposure to bitcoin, do you buy spot bitcoin (which can still be very tricky, with many legal and regulatory hoops to jump through), or do you buy GBTC stocks that are trading at 10%-20% % discount on NAV?
This doesn’t make sense, the fact is that this dynamic has taken a lot of buying pressure out of the market.
Over the next two months, the equivalent of 82,818 BTC GBTC shares will open, and as long as GBTC continues to trade at a discount to NAV (which is quite expected), a lot of Bitcoin demand will go towards GBTC, which will not be reflected in the Bitcoin price.