Grayscale walks down the altar? GBTC continues to have negative premiums, it is difficult to stop the decline

This year, since the Grayscale Bitcoin Trust (GBTC) first showed a negative premium of -0.68% on February 23, as of March 21, except for the two days of positive returns on February 24 and March 1, Premium, the rest of the time was traded at a negative premium, and the negative premium on March 4 reached -11.59%. Why did this happen?

1. The mechanism of GBTC

GBTC is a Bitcoin trust fund that holds Bitcoin and sells the share of assets corresponding to Bitcoin to qualified institutional investors through the over-the-counter market. Each share of GBTC is roughly equivalent to 0.0095BTC.

As an institutional investor, in addition to buying GBTC in the secondary market, they can also purchase newly sold shares from GBTC based on their net asset value, or convert their bitcoins into corresponding GBTC shares. In the early days of its establishment, GBTC allowed authorized partners to redeem the corresponding Bitcoin assets, but this practice was fined by the SEC in 2014 and suspended in 2016. Since then, GBTC has been restricted from access. Status, that is, funds or Bitcoin can enter GBTC, but the corresponding BTC assets cannot be redeemed, and can only be cashed out by selling. For managed assets, GBTC charges a 2% management fee per year.

At present, GBTC's asset management scale is 38 billion U.S. dollars, that is to say, the annual management fee alone has an income of 760 million U.S. dollars.

Because of the irredeemable feature of GBTC, it is different from Bitcoin ETFs in the true sense, which also causes the price of GBTC to deviate from the actual asset price it represents. In most of the past, GBTC has Compared with the corresponding BTC assets, they are all in a premium state. In 2020, the average premium is 30%. In the bull market stage of 2017, the premium once reached more than 100%. However, in recent weeks, GBTC has been trading at a negative premium on net assets.

2. Negative premium means that funds are flowing out of GBTC, but not necessarily out of the entire industry

Previously, it was not an easy task for the majority of institutions to invest in digital assets. In addition to the security issues faced by digital assets in storage, they also faced compliance issues. Many institutions simply could not buy in accordance with existing rules. Digital currency, and the emergence of GBTC has filled this gap in the market and has been the only way for US institutional funds to participate in digital currency investment for a long time. Because GBTC provides a more convenient investment method, it is only natural for investment institutions to pay premiums.

Today, a large number of more competitive products have appeared on the market. Currently, Canada has listed three Bitcoin ETFs. The annual management fee of Osprey Bitcoin Trust (code OBTC) is as low as 0.49%. For institutional investors, swapping positions to other funds is only a management fee. You can save a lot of money.

At the same time, GBTC's long-standing arbitrage space due to its premium no longer exists. In the past, news about GBTC's substantial increase in BTC holdings was often swiped. This was due to the arbitrage space caused by the premium: investment institutions could "borrow" GBTC from GBTC holders, sell it in the secondary market, and use the money they get Buy the newly issued GBTC share of GBTC at the net asset price, and give the debit after adding the interest. The borrower succeeded in arbitrage, and the lender earned interest. The final result was that GBTC's holdings rose sharply.

However, when the premium is negative, such arbitrage space no longer exists. If the net assets of GBTC can be redeemed, in theory, investors can take another arbitrage method: buy GBTC shares at a discount in the secondary market, and sell them in other markets for profit after redemption. The inability to redeem GBTC makes this path of arbitrage impossible. The management of GBTC does not seem to have the incentive to change the status quo. After all, its main income is to collect management fees, and the fact that it has not been able to redeem it has caused it to manage more and more assets, which can charge more management fees.

It is foreseeable that after the arbitrage space disappears, there will be less and less funds entering GBTC in the future, and current holders may also exchange positions for lower management fees and more flexible management mechanisms. For GBTC , If the redemption mechanism and management fees cannot be improved, it may be difficult to change the trend of capital outflow.

3. Can Grayscale's crazy listing change the status quo?

On March 17, Grayscale Trust announced that they would provide five new digital currency trusts on the current basis, namely Basic Attention Token (BAT), Chainlink (LINK), Decentraland (MANA), Filecoin (FIL) And Livepeer (LPT), then, can such an approach change the downward trend of capital outflows?

It is worth mentioning that Grayscale Trust's Litecoin-based trust product LTCN has a long-term premium of more than 1000%. Why is there no institutional arbitrage to flatten it? The reason is that its liquidity is too poor, with an average daily trading volume of only 800,000 or 900,000 U.S. dollars, and institutions are obviously not interested in participating.

At present, LTC ranks ninth in the market value of all cryptocurrencies, and among the five new currencies on Grayscale Trust, LINK has the highest market value, but it still ranks behind LTC, and its daily transaction volume is less than half of LTC. It is foreseeable that if the new currencies do not have a sudden burst of prices or trading volume to attract new institutions to enter the market, it will hardly have a significant effect on redeeming the outflow of funds from Grayscale Trust. (The head picture comes from CoinMarketCap)