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GBTC premium matches Bitcoin price crash levels as unlocking fear fades

Funds are flowing back into GBTC, data suggests, as CEO Sonnenshein reiterates plans to turn Grayscale crypto funds into ETFs.

The Grayscale Bitcoin Trust (GBTC) is echoing bullish sentiment in Bitcoin (BTC) as its premium over spot price rises to its highest since May.

Data from analytics resource Bybt shows that on Tuesday, the so-called Grayscale premium stood at -5.88%. The last time it was closer to zero was on May 25.

GBTC premium slips above -6%

That was a week after Bitcoin began a major price drawdown, which this week has finally shown signs of abating.

GBTC has been the subject of intense speculation since Bitcoin’s 55% price dip, with unlocking of GBTC shares allegedly capable of adding to selling pressure.

As Cointelegraph reported, such a premise is false by default, given restrictions in place on GBTC holders.

Nonetheless, interest in purchasing has resurfaced this month in particular, with conspicuous names adding to their tranche and increasing their Bitcoin exposure.

The Grayscale premium — the trading price of GBTC relative to the net asset value (NAV) of its BTC holdings — has increased in step, trending back to zero after an extended stay in negative territory.

With unlockings mostly complete, the narrative surrounding Bitcoin price suppression has all but disappeared.

“$GBTC premium has gone from -15% to -5% in 5 days,” trader and analyst Nick Hellmann commented on the latest changes.

“If $BTC can maintain these levels and have Grayscale premiums flip positive that will add fuel to this Bitcoin fire.”
GBTC premium chart. Source: Bybt

Purpose Bitcoin ETF holdings hit pre-crash levels

Despite mixed perceptions over GBTC, one figure decidedly not at all bearish on any timeframe is Grayscale CEO Michael Sonnenshein.

In the company’s latest mid-year shareholder letter, Sonnenshein reiterated previous public statements about his intent to turn GBTC, along with its altcoin-focused equivalents, into exchange-traded funds (ETF).

“We are 100% committed to converting Grayscale Bitcoin Trust (symbol: GBTC), Grayscale Ethereum Trust (symbol: ETHE), and our other investment products into ETFs,” the letter reads.

With the United States yet to approve a single Bitcoin ETF, neighboring Canada, which gave the green light to the first player, the Purpose Bitcoin ETF, has never looked back.

On Tuesday, Purpose’s assets under management jumped from $900 million Canadian dollars to $1.1 billion CAD — its highest since May 13.

Purpose Bitcoin ETF assets under management chart. Source: Bybt

Crypto Stories: Scott Melker tells the story of how he became The Wolf of All Streets

Is Bitcoin in danger of losing $30K with Grayscale’s big GBTC unlocking in two weeks?

Bitcoin prices remain under pressure in the $30,000-$40,000 zone as traders brace for the 16,000 BTC worth of GBTC shares unlocking in July.

Whether a potential sell-off of shares tied to a multi-billion dollar Bitcoin (BTC) investment fund could crash the cryptocurrency's spot prices has turned into a hotly debated topic among the analysts in the space.

Grayscale's premium remains negative for months 

The argument concerns Grayscale Bitcoin Trust, the world's largest digital assets manager that allows institutional investors to gain indirect exposure in the Bitcoin market through its product, GBTC. Investors purchase GBTC shares directly via Grayscale in daily private placements by paying in either Bitcoin or the U.S. dollar.

Nevertheless, investors can sell their GBTC shares only after a six-month lockup period in secondary markets to other parties. Therefore, they anticipate liquidating at a premium when the market price at the time of sale crosses above the native asset value (NAV).

On the other hand, liquidating GBTC shares when the market price has dipped below the NAV brings losses. So if investors decide to dump their GBTC holdings, they would have to do so for a financial casualty. That is because the share has been trading at a discount, i.e., under its NAV, since February 24, 2021.

GBTC premium has been negative for months. Source: ByBt.com

Some analysts, including strategists at JPMorgan, believe that accredited investors will sell at least a portion of their GBTC holdings after the July unlocking period, thus weighing further on the ongoing Bitcoin market downtrend.

“Despite this week’s correction, we are reluctant to abandon our negative outlook for Bitcoin and crypto markets more generally. So despite some improvement, our signals remain overall bearish," said Nikolas Panigirtzoglou, the lead strategist at JPMorgan, in a note to clients.

Nevertheless, other analysts believe that the event will flush sellers from the market in July, opening up both volatility and bullish potential to break new all-time highs.

Is Bitcoin price correlated to Grayscale unlock dates? 

It is the GBTC shares that were scooped up by investors at around 40% premium in December 2020, explained Panigirtzoglou. The month saw Grayscale Bitcoin Trust attractive inflows of $2 billion, followed by $1.7 billion in January.

That means about 140,000 Bitcoin worth of shares will get unlocked by the end of July. About 139,000 Bitcoin have already been released between mid-April to mid-June, a period that also coincided with spot BTC/USD's crash from around $65,000 to as low as $28,800.

Lyn Alden, the founder of Lyn Alden Investment Strategy, noted the correlation between the spot Bitcoin price crash and its Grayscale's GBTC unlocking periods, noting that the same could happen as more shares get unlocked in July.

Grayscale Bitcoin Trust Unlock dates. Source: Bybt.com

Alden hinted that the correlation pointed to a deceleration of Grayscale's "neutral arbitrage trade."

In arbitrage trade, institutional investors (like hedge funds) borrow Bitcoin to purchase GBTC shares. Then, after the lock-up expires, these investors sell GBTC shares to secondary markets to retail investors, typically for a premium. Then, they return the borrowed Bitcoin to their lenders and pocket the difference.

"Part of the run-up in the second half of 2020 was due to the Grayscale neutral arbitrage trade, sucking in a ton of bitcoin," Alden tweeted late Monday, adding:

"When ETFs and other new ways to access bitcoin made GBTC less unique, the premium went away, so the neutral arb trade went away."
Grayscale Investments stopped selling GBTC shares after February 2021. Source: ByBt.com

But, according to David Lifchitz of ExoAlpha, arbitrage strategy might have contributed to but did not cause the Bitcoin price plunge.

The chief investment officer noted that the real GBTC arbitrage trade strategy is for investors with deep pockets. That is because they would require to hold the short Bitcoin position during the GBTC lockup period — the overtime costs would risk offsetting the price differential that was arbitrage away.

"And for the simple buyers of GBTC shares at a discount vs. BTC who didn't sell short BTC against, their profit depends on the price at which they bought GBTC: if they bought between $40K and $60K, they are in the red today... and may not want to sell just yet and lock-in their loss," he told Cointelegraph.

Michael Sonnenshein, the chief executive of Grayscale, told Barron's that investors buy the GBTC shares with a medium- to long-term outlook. So they might not want to dump their holdings immediately upon its unlocking.

Sonnenshein added:

“I would generally say that investors certainly are going to think about where the price of the shares is, relative to net asset value or relative to Bitcoin before they would think about getting any liquidity.” 

The views and opinions expressed here are solely those of the author and do not necessarily reflect the views of Cointelegraph.com. Every investment and trading move involves risk, you should conduct your own research when making a decision.

Crypto Stories: Scott Melker tells the story of how he became The Wolf of All Streets

Why is Wall Street becoming less interested in Grayscale’s Bitcoin Trust?

BTC demand via Grayscale Bitcoin Trust is dropping for several key reasons.

There is a reason why Grayscale Bitcoin Trust (GBTC) emerged as a benchmark to measure institutional interest in Bitcoin (BTC).

Grayscale no longer the only option for investors

The digital currency investment product was among the only ones that offered hedge funds, endowments, pension funds, and family offices a way to gain exposure to Bitcoin without needing them to own the digital asset themselves.

Therefore, a rising capital inflow into GBTC — such as the one reported last year, wherein Wall Street investors deposited about $18.2 billion in the fund — served as a metric to gauge growing institutional interest in the crypto sector. Conversely, a declining capital inflow reflected institutional withdrawal or profit-taking, like the one happening since the first quarter of 2021.

On-chain analytics service Skew reported Thursday that GBTC stopped attracting fresh investments after February 2021. The capital inflows paused right when GBTC started trading at a negative premium to its net asset value, or NAV. NAV represents the underlying market value of the holdings.

Money stops flowing into Grayscale Bitcoin Trust as its premium flips negative. Source: Skew

The GBTC premium was upward of 30% at the beginning of this year. But the latest Skew chart pinpoints it at -11.40%. GBTC's premium to its NAV was min40.20% at its sessional low, its worst level in history.

Meanwhile, GBTC premium logged mild recoveries in early April after Grayscale announced its intentions to convert its trust structure to an exchange-traded fund (ETF). The New York firm's decision came in the wake of growing competition from then-newly launched ETFs in Canada, primarily as they offered better expense ratios than Grayscale's.

For instance, Purpose, the world's first physically settled Bitcoin ETF, surfaced with an expense ratio of 1%. Evolve and CI Galaxy, other Canadian Bitcoin ETFs, offered 0.75% and 0.40%, respectively. Meanwhile, Grayscale's expense ratio was a heightened 2%.

Business rivalries with Canadian Bitcoin ETFs might have also choked capital inflows into GBTC. Purpose, for instance, raked in $1 billion capital a month after its launch in February, reflecting that demand for Bitcoin investment products remained higher despite a plunge in GBTC's inflows.

Musk rattled Wall Street Bitcoin investors

The period also saw Bitcoin's spot rate riding higher on the Elon Musk factor. Following Tesla's revelation that it was holding $1.5 billion worth of BTC in its balance sheets, the cost to purchase one Bitcoin rose from as low as $38,057 on Feb. 8 to as high as $64,899 on April 14, with speculators believing that more corporates would replace a portion of their cash holdings with the flagship cryptocurrency.

But GBTC premium stayed negative during the course of Bitcoin's February-April price rally. Its minus 40.20% bottom appeared when BTC/USD started shedding its gains owing to profit-taking, China's crypto ban, and Tesla's Bitcoin dump rumors.

Bitcoin correction sentiment accelerated after Musk criticized the cryptocurrency for its carbon footprints. Source: BTCUSD on TradingView

Daniel Martins, the founder of independent research firm DM Martins Research, highlighted the decline as a sign of waning Wall Street interest in Bitcoin-related investments, especially after the cryptocurrency became a clear victim of Musk's anti-Bitcoin tweets mid-May, losing more than half its valuation at one point later.

Martins further noted that Grayscale reported 500% higher annualized returns than Nasdaq, but its correction was also worse than the 2008's Great Recession — 82% vs. Nasdaq's 17%. That made Grayscale's bitcoin investment product an "ultra-leveraged bet," accompanied by an inferior risk-adjusted performance. The analyst added:

"GBTC's volatility has been nearly nine times as high as the Nasdaq's: 145% vs. 17%."

Grayscale ETF in 2021?

Martins' statements highlighted possibilities that GBTC premium could face further downside moves as investors hunt for more stable alternatives against Bitcoin's ongoing price correction.

Moreover, its rivalry from other digital currency investment alternatives, including cryptocurrency custodian services that offer institutional investors to own real crypto assets at a cheaper fee, further risks limited capital inflow.

ETF.com's analyst Sumit Roy wrote that the Grayscale fund's potential transition into an ETF ends its 2%-fee days as it would need to compete with an army of other ETFs, led by firms like Bitwise, Vanguard, Fidelity, Cboe, and others. He added:

"Yet regardless of what happens, GBTC is poised to be a force, and will likely stick around no matter how the crypto fund space evolves."

But whether the US markets would have access to a Bitcoin ETF in 2021 remains a mystery itself. Financial Times reported earlier this week that most ETF applications gather dust as the US Securities and Exchange Commission's chair Gary Gensler reiterated worries about investor protection in crypto markets.

“I expect that [delay] to happen with all of our filings, to be honest,” said Laura Morrison, global head of listings at Cboe.

Crypto Stories: Scott Melker tells the story of how he became The Wolf of All Streets

Bytetree Founder Believes Grayscale Should Lower Its ‘Unrealistically High’ Fee: Warns of Possible ‘Systemic Risk’

Bytetree Founder Believes Grayscale Should Lower Its ‘Unrealistically High’ Fee: Warns of Possible ‘Systemic Risk’The founder of Bytetree Asset Management, Charlie Morris, has suggested the reduction of the GBTC management fee as one way Grayscale Investment can ease the current selling pressure and possibly reduce the discount on the shares. Morris says if no action is taken, “the selling pressure will build” and “could morph into a systemic risk.” […]

Crypto Stories: Scott Melker tells the story of how he became The Wolf of All Streets