The Grayscale Bitcoin Trust continues to trade at a discount to BTC, posing a peculiar threat to Grayscale and investors.
Since 2013, the Grayscale Bitcoin Trust Fund (GBTC) has provided its investors with exposure to Bitcoin (BTC) via a publicly-traded private instrument. However, the trust’s convertibility and liquidity are significantly different from those of an ETF (ETF).
At least in regulatory terms, trusts are organized as entities and are ‘closed-end funds’ that can initially only be sold to approved investors. As a result, the number of available shares is restricted, and retail traders can only obtain them through secondary markets. A GBTC share, in addition, cannot be exchanged for the underlying BTC position.
GBTC used to trade above the equivalent BTC owned by the fund in the past due to the retail crowd’s excess demand. For institutional clients, it was common practice to purchase shares directly from Grayscale at par and then sell at a profit after the six-month lock-up era.
GBTC shares traded at a premium to their Net Asset Value (NAV) for the majority of 2020, ranging from 5% to 40%. However, in March 2021, the situation radically changed. The acceptance of two Bitcoin ETFs in Canada aided in the demise of the GBTC premium.
ETF funds are less risky and less expensive than trusts. Furthermore, there is no lock-up duration, and institutional investors have direct access to purchase shares at par. As a result, the advent of a better Bitcoin investment vehicle snatched away most of the allure that GBTC once had.
Is DCG capable of rescuing GBTC?
The GBTC premium reached difficult territory in late February, and investors started desperately flipping their positions to avoid being trapped in a costly and non-redeemable instrument. Despite BTC hitting an all-time high in mid-March, the situation has worsened to an 18% discount.
Grayscale Investments’ parent company, Digital Currency Group (DCG), disclosed a deal to buy up to $250 million in GBTC shares on March 10. Although the conglomerate did not explain the reason for the move, the unreasonable discount would have undoubtedly harmed their image.
As the situation worsened, DCG announced a plan to convert its trust funds into a U.S. ETF, but no clear promises or deadlines were provided.
On May 3, the company reported that it had acquired $193.5 million in GBTC stock by April. Furthermore, DCG expanded its GBTC share repurchase capacity to $750 million.
Given the GBTC trust’s $36.3 billion in assets under management, there’s reason to think that purchasing $500 million in shares might not be enough to offset the price discount.
As a result, certain critical issues arise. Will DCG, for example, lose money on such a trade? Who is desperate to sell, and is an ETF conversion being considered?
As the fund administrator’s controller, DCG has the authority to purchase the trust fund’s stock at market value and redeem the corresponding Bitcoin for redemption. Buying GBTC at a discount and selling the BTC at market rates will always result in a profit, and there is no danger in doing so.
As a result, several retail sellers are likely exiting the commodity at any cost, but this is impossible to know at this time.
Although purchasing GBTC at a 10% or more significant discount could seem to be a good deal at first, investors should keep in mind that there is currently no way to get out of those shares other than to sell them at the market.