Grayscale’s Bitcoin Trust (GBTC) made the headlines yesterday again with its record one-day addition of 16,244 bitcoin, adding to its stack of over 630,000 bitcoin and total assets under management (AUM) of approximately $ 23 billion. Clearly, business is good. So, who are Grayscale’s investors? Is the GBTC premium an incentive or a discouragement? And where will this fund go in the future?
What is GBTC?
Grayscale owns bitcoin in its GBTC trust, and investors are buying shares representing some of that bitcoin. There is a management fee of 2 percent per year, in addition to a ‘premium’. The premium is the difference between the underlying bitcoin value (native asset value or “NAV”) versus the market price of the holdings (what the shares cost).
There are two tiers of investors. There are investors in the base tier – accredited investors who have been selected to buy into the fund’s private placement at the “NAV” price, which is the price of the underlying bitcoin value. Investors in the base tier can send USD or bitcoin and receive a number of shares equal to the bitcoin value (it is currently 0.00094919 BTC / share).
Another important point is that it is one way. Once you have placed bitcoin in the trust, it cannot be removed. Investors can sell their shares, but the bitcoin remains in the trust and off the market.
Grayscale Bitcoin Trust does not currently have a redemption program and may discontinue its creations from time to time. There can be no assurance that the value of the shares will approach the value of the Bitcoin held by the Trust and the shares can be traded at a significant premium above or below the value of the Trust’s Bitcoin. The Trust may, but is not required to, seek regulatory approval to conduct a redemption program. “
Investors in the base tier are blocked for six months before they can sell their shares in the open market to the second tier investors. These secondary investors have to pay the higher market price for the stock. 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 (equivalent to an approximately 6 percent stake in the trust). It is one of the investors benefiting from the recent transaction by entering the base tier of the fund as a private placement.
By investing at the NAV, on the base tier, its stock will be locked for six months, but will then be able to sell the stock at the higher market price and lock in the premium. The premium has historically remained around 20 percent, but it could pump into a bull market where demand for the stocks is high. In December 2020, for example, it surpassed 40 percent.
Another investor benefiting from this? BlockFi, which owns approximately 5 percent of the shares in the trust. Blockfi gives you about a 6 percent return when you lend your bitcoin, as it can then lend your bitcoin to groups like the Grayscale Trust. In this case, the Grayscale borrows the bitcoin and enters the fund where it can benefit from the premium.
For those second tier investors who buy shares in the open market, the premium is an increased risk. If bitcoin falls hard, the losses will be deeper as you drop the NAV (price of bitcoin), as well as a drop in the premium you bought. Likewise, if you buy before a bull market and a corresponding premium pump, your profit could be greater.
Why the premium? It is the market gap between supply and demand. Stock demand is outstripping supply as new stocks are constantly being created, but these are slowed by the six-month freeze. Conversely, ETFs keep premiums in check because new stocks can also be created continuously, but they have no lock-up and can trade immediately. Premiums can be canceled.
Is the premium worth it?
Why are smaller, secondary investors accepting this GBTC premium risk versus a pure bitcoin purchase?
First, you can easily buy it with your traditional brokerage account. Two: you avoid self-confidence. Three, there are tax breaks because the IRA is eligible. And four, if you think a bull run is coming, you can take advantage of a premium pump.
Accredited investors obviously have a strong incentive with the premium to go into the private placement, but it is more than that. For some institutional investors, GBTC is one of the few ways they can gain exposure to bitcoin. Many investment funds have charters that limit direct investment in cryptocurrency and / or they don’t want the hassle of holding bitcoin. But basically anyone can invest in publicly traded assets, such as GBTC, so they get the best of both worlds. Their internal regulations allow it and they avoid self-detention.
But this will not last forever. As the market ages and there are more options to trade bitcoin in a public market (such as a bitcoin ETF), fewer secondary investors will be willing to pay the premium and it will fall to meet the lower demand. When this happens, GBTC will likely cut its above-average management fee of 2 percent and should convert to an ETF.
Generally, the GBTC premium takes place in the secondary market and offers a very attractive trade for accredited investors who can participate in the private placement and invest against bitcoin’s NAV at the base level of the fund. However, this premium will start to disappear as the market ages and more options arise to trade bitcoin in the public market.
This is a guest post from Ellie Frost. The views expressed are entirely their own and do not necessarily reflect those of BTC Inc or Bitcoin Magazine.