Grayscale’s Bitcoin Trust shares (GBTC) are currently trading at $7.49 per share, a 15.81% premium of Bitcoin. GBTC is the first publicly quoted security “solely invested in and deriving value from” Bitcoin and since listing it has been known to trade at a high premium, having hit a 2020 high of 41.42% on Feb. 18. The premium is usually accentuated when prices are high.
The GBTC-BTC premium has dropped by over 30% since February this year, following Grayscale’s registration as a reporting company with the United States Securities and Exchange Commission as well as another private placement of its shares in February.
The Bitcoin price (BTC) is currently sitting at $7,058, having rallied by 21% in the last month. Although a pullback is still possible, Bitcoin price has recovered from the March 13 crash, and the reduced premium between GBTC and BTC is yet another bearish sign for Bitcoin as market sentiment continues to point toward extreme fear among investors.
GBTC Premium or Discount to NAV. Source: YCharts
Low institutional appetite?
The falling premium between GBTC and the Bitcoin price can be interpreted as a sign of reduced appetite from institutional investors who, according to Grayscale, make up 80% of its client base for the Bitcoin Trust.
This perspective could be further backed by the lowered volumes in the CME regulated futures market which in March saw a 44% decrease from the previous month. This is despite volumes increasing in unregulated derivatives markets and in spot markets alike.
However, Grayscale has seen increased interest from institutional investors having reported investments reaching a record-breaking $171.7 million during a single month of private offerings in 2019. While the coronavirus and the Black Thursday crash may have shaken the market, Grayscale currently manages $2.1 billion in assets for GBTC and other developments like Qi3’s Bitcoin fund show that there is still institutional demand to be filled.
GBTC Cumulative weekly investment - 2019. Source: Grayscale
There are other factors to consider in order to understand the GBTC-BTC premium and why it seems to be dropping ever lower. While the premium is generally accentuated or decreased in bullish or bearish markets, the dynamic of the GBTC premium may be changing permanently.
Increasing liquidity for GBTC
GBTC offers periodic private placement rounds that are available to accredited investors. In previous offerings, investors had a 1-year lockup period during which shares could not be sold since the products were not registered with the SEC.
After this period, investors could sell shares in over-the-counter markets, given that Grayscale does not provide a redemption service for the underlying native asset.
This system creates a liquidity cycle and increases selling pressure one year after each private placement event. Coinmetrics co-founder, Nic Carter, pointed this out in a January tweet. Carter wrote:
“I'd be willing to bet that the GBTC premium will be crushed to single digits on the week of July 15 2020 and October 21 2020."
However, while Carter’s observation holds true, the date may come sooner than expected as Grayscale’s registration as a reporting company with the SEC would grant its products a reduced lockup period of 6 months. This could possibly result in increased liquidity and reduced premiums.
Hedge funds and risk-free arbitrage
Although GBTC is also available to retail investors, Grayscale’s recent report shows that overwhelming interest comes from institutional investors, particularly hedge funds.
According to Keegan Toci, Partner at Vertical Ascent Capital Management, accredited investors have an excellent opportunity to short GBTC at a premium, buying it back at a discount for the NAV price in which private placement events are priced.
The selling pressure created by arbitrage, along with the possibility for early liquidity provided by the SEC registration and negative sentiment in the market have created the perfect storm for GBTC’s falling premium.
The “days of high premiums are over”
While the premium in GBTC has usually increased after private placement events and especially during Bitcoin price rallies, it’s possible that the GBTC and Bitcoin price will see a narrower gap from now on. As new options for institutional investors appear in the market, competition may drive these premiums down.
According to Nic Carter:
“I find it extremely plausible that in a flat market 100s of millions in sales of GBTC (look at the subscription volume) would crush the premium. plus, there's many other ways to get exposure to BTC than GBTC these days. days of high premium are over.”
As options for institutional exposure to the Bitcoin price continue to widen, one thing seems to be clear: the infrastructure required for the long-awaited institutional boom continues to become more robust and diverse.
Although the coronavirus has instilled fear in investors, Bitcoin may hold true as a store of value, much like gold, and the upcoming halving may jumpstart yet another bull rally for Bitcoin and pave the way for increased institutional interest.