important point

  • Grayscale Bitcoin Trust (GBTC) continues to trade at a discount to its net worth
  • The discount rate shrunk to its lowest level since September on hopes that the fund will likely convert to an ETF.
  • The Entire GBTC Debacle Represents a Chaos in the U.S. Institutional Regulatory Environment
  • Spot ETFs are a question of when, not if, and such vehicles will be a thing of the past.
  • That doesn’t allay GBTC investors’ frustration. GBTC investors have been hit hard by the emergence of Bitcoin alternatives and the drying up of demand for trusts.

One interesting aspect of the impact of the recent flood of spot Bitcoin ETF filings is how it will affect the controversial Grayscale Bitcoin Trust (GBTC).

Three weeks after BlackRock’s ETF filing was announced, the trust surged, up 56% in three weeks.

Notably, this means that it has significantly outperformed its underlying asset, Bitcoin. As good as that sounds, it really sums up the problems with this investment vehicle that have only frustrated investors in recent years, but we’ll get to that in a second.

I have plotted GBTC’s movement against Bitcoin itself in the following chart. This highlights the outperformance the trust has shown since its ETF filing, with bitcoin itself up “only” 21%.

Grayscale discount to net worth is shrinking, but still huge

The trust’s net asset value discount rate has also shrunk to its lowest level since September and is now below 30%. That’s because investors are betting that the conversion of trusts to ETFs will eventually be allowed.

When this transformation occurs, the discount shrinks to almost zero as funds can move in and out of the vehicle without affecting the underlying asset. It will remain a trust for the time being, but there is no way to withdraw Bitcoin from GBTC. This, coupled with the high fees (2% per annum), mean that the significant discounts continue.

In fact, the very existence of grayscale trusts is a blemish in the field. The discount rates being traded are farcical, and even after the recent contraction, the 30% delta is a huge gap, hurting investors.

The huge amount of assets under management is inherently locked up by the nature of closed funds and feels like a throwback to the days when everyone wanted to touch bitcoin by any means necessary. increase. Grayscale was the only store in town, and combined with its monopoly power, the demand for Bitcoin was so high that Bitcoin traded at a premium for most of its early history.

However, as more and more Bitcoin-enabled mediums come online, the premium turns into a discount, and the discount turns into a big. Perhaps it’s fair to say that this is a return to the bull market of yesteryear, with investors showing a lack of due diligence on how the fund works.

Without the captain’s afterthought costume, there will always be competitors coming online, and premium will inevitably come under pressure. Investing in GBTC essentially makes him do two things. A bet on Bitcoin and a bet on the trust being converted into his ETF. quickly.

But we might be able to show some sympathy to investors in that regard. Investment manager Osprey Funds, which has a similar product, sued Grayscale earlier this year after a competitor misled investors about the potential conversion of GBTC to an ETF. They claim that this is how they have gained so much market share.

“Despite charging more than four times the asset management fee that Osprey charges for its services, Grayscale has to date made approximately $99.50 in two participating markets thanks to false and misleading advertising and promotions. 100% market share,” the lawsuit said. claim.

Grayscale has been trying and failing for years to convert this vehicle into an ETF, whether it knew of the regulatory difficulties it would face. Last year, the company sued the SEC itself for calling the denial “arbitrary.”

Changes in institutional climate

My view on the trust as a whole remains unchanged. I believe this is (clearly) a terrible investment, and its very existence is just a byproduct of the regulatory woes this industry has struggled with. There is literally no reason to even consider buying this unless you have other means of gaining bitcoin exposure.

The day will come when all this warfare over trusts and ETFs will likely be nothing more than a throwback to more uncertain times. But time is a luxury that many investors don’t have, grayscale is a terrifying investment, and some of the hardships the sector has gone through to bridge the gap to becoming a respected mainstream financial asset. It was typical in many respects.

Not only is the discount rate uncomfortable as it stands, but it has expanded to over 50% in the aftermath of the FTX collapse, which revealed that cryptocurrency broker Genesis was in serious trouble. Genesis is owned by the same parent company as Grayscale, Digital Currency Group (DCG). Genesis eventually filed for bankruptcy in January.

This has raised concerns about the safety of Grayscale’s reserves, but the company’s refusal to provide proof of reserves on-chain, citing “safety concerns,” has criticized investors. It wasn’t necessarily reassuring.

While the commotion over buried treasure has subsided, this episode serves as a stark reminder of the often repeated (but perhaps not frequent enough) phrase, “It’s not a key, it’s not a coin.” became.

The problem for institutions so far has been that direct access to bitcoin has been difficult for a variety of reasons, mostly regulatory-related. Spot ETFs also technically violate the “not your key” principle, but with careful regulatory oversight and strong administrators, this could be a safe way for institutions to gain exposure to Bitcoin. It should be.

That would put an end to nonsense like trusts trading at a 30% discount (that’s really the right word) and give investors a safe way to convince themselves of their opinion on Bitcoin. That may be a long way off, but if demand for these products remains, it’s only a matter of time.

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