Bitcoin (BTC) is struggling to break the $ 40,000 mark again after briefly crossing it on May 26. The cryptocurrency is currently exchanging hands around the $ 36,000 mark, which is a 44% drop from its all-time high of $ 64,889 on April 14. Among others, a key difference between macroeconomic conditions affecting the cryptocurrency market as a whole is institutional demand.
One of the key investment vehicles for established demand is the Grayscale Bitcoin Trust (GBTC), a BTC trust from Grayscale Investments, one of the most important investment managers for institutions that indulge in digital currencies. The trust allows investors to be exposed to the price of Bitcoin through a regulated traditional investment vehicle without having to buy, store and save their token directly.
GBTC is publicly listed on OTCQX, an over-the-counter market that allows trading of stocks. GBTC is currently trading in the $ 30 range, down 46% from its all-time high of $ 58.22 on February 19.
Each share represents 0.00094716 BTC, and the share tracks the market price of Bitcoin, excluding applicable fees and expenses. It has a minimum holding period of six months and a minimum investment requirement of $ 50,000, which means that it is not ideal for retail investors.
Negative grayscale BTC premium for more than three months
Due to the implications of institutional demand supporting grayscale and the fact that it is a regulated way to gain exposure to Bitcoin, its products are generally traded at a premium to the net asset value (NAV) or the present value of holdings. . The GBTC premium refers to the difference between the value of the assets held by the trust versus the market price of those shares.
Before February 23 of this year, this difference was always a positive number indicating a premium that reached its all-time high of 122.27% four years ago on June 6, 2017. Since the end of February of this year, the premium has been converted into a discount that reached an all-time low of -17.89% on May 16.
Since this difference is driven by supply and demand factors in the market, a rising GBTC premium shows a higher entry of Bitcoin into the trust, while a decreasing premium that turns into a discount indicates a decreasing BTC entry. , which implies that GBTC is trading at a spot discount. Bitcoin price.
Cointelegraph discussed the implications of GBTC’s premium trend reversal with Nikita Ovchinnik, director of business development for 1inch Network, a decentralized cryptocurrency exchange. Ovchinnik said: “It seems that the GBTC premium is a very good indicator of market sentiment over the medium term. The premium turned negative at the end of April, and although digital assets experienced a local boom, the lack of institutional interest predicted the contraction of the May market capitalization. “
This trend is consistent with the amount of Bitcoin that grayscale confidence has in its holdings, as it has been gradually increasing since January 13 to reach its all-time high of 655,702.89 tokens on March 2. Since then, its Bitcoin reserves have been on the gradual decline for the first time to the current levels of 652,410.55 as of June 4. The trust currently has an AUM of $ 24.27 billion.
The premium allows investors to take advantage of this opportunity through arbitrage opportunities. One way is for investors to borrow Bitcoin and use it as an exchange for GBTC shares. After the six-month lock-in period ends, investors can sell the shares on the secondary market at the prevailing premium.
With the funds they receive in this exchange, they buy and return the BTC tokens loaned to the lender. In this process, investors pocket the price difference created due to the premium, thus successfully executing their arbitrage. Ovchinnik further opined:
“GBTC is one of the most convenient and secure entry points for institutional funds. It appears their demand was one of the drivers in early 2021, but it slowed down and we are no longer hearing new entities claiming that they have decided to diversify and are trying to hold blockchain assets. “
In traditional financial markets, the GBTC premium / discount can be compared to the price of closed mutual funds. Ideally, since the amount of Bitcoin per trust is publicly disclosed, the value of the trust should amount to exactly that value. Due to the premium / discount factors mentioned above, the value is not the same.
Bryan Routledge, associate professor of finance at Carnegie Mellon University’s Tepper School of Business, told Cointelegraph that the “premium reflected its position as a ‘regulated’ alternative to owning Bitcoin,” therefore, “an investor would pay. a premium for access through a trust. ” Routledge also added that the GBTC premium should not be perceived as an additional cost:
“If you buy and sell and the premium is the same, the impact is minimal. Recently, there are easier and more convenient ways to access Bitcoin, which is why the grayscale premium has dropped. It now has a discount relative to Bitcoin NAV. “
Despite the GBTC trading as a discount relative to the NAV, there have been some positive signs in the recent trend. GBTC’s discount rebounded sharply between May 21-24 from -21.23% to -3.86% before falling to around -12% from June 3. This indicates that institutional interest is increasing along with the decline in Bitcoin prices between these days.
The direction in which the GBTC premium / discount is moving could function as an indicator of market sentiment in the asset, especially among institutional investors.
Bitcoin ETFs are a close competitor to GBTC
Besides GBTC, another route for institutional and retail investors to expose themselves to Bitcoin price volatility through a regulated channel is Bitcoin exchange-traded funds.
Purpose Investments launched North America’s first Bitcoin ETF on February 18, which saw Assets Under Management (AUM) surge to over $ 500 million in less than a week and thereafter. crossed $ 1 billion in the same month. The AUM of the ETF is currently $ 714.6 million or 19,407.63 Bitcoin as of June 4 and uses the BTCC ticker.
In addition to Purpose’s BTC ETF, Evolve ETFs launched their own Bitcoin ETF on February 19 with the EBIT ticker. Although he lost the first-to-act advantage obtained by the Purpose ETF, he currently has assets under management of $ 78.52 million, which is just over 12% of BTCC’s current AUM. Generally, there are several notable ETFs that are listed on the Toronto Stock Exchange.
Related: Carbon-neutral Bitcoin funds gain traction as investors seek greener crypto
What’s interesting to note about these ETFs is that the timing of their launch coincides with a decline in GBTC’s premium, which eventually turned into a discount. Routledge mentioned why this might be the case, “ETFs are a cheaper way (transaction costs, fees) of exposure to Bitcoin. Therefore, the premium on grayscale has decreased, reflecting good old-fashioned competition. “
The GBTC trust has a 2% administration fee, while the Purpose BTC ETF has a 1% administration fee, and the Evolve ETF fee is even less than 0.75%. Due to the success of existing Canadian ETFs, the attractiveness of the ETF market is such that even Grayscale has confirmed that it will convert its products to ETFs instead.
But before that, they would need the much more elusive approval from the U.S. Securities and Exchange Commission that several companies have already applied for, including Fidelity and SkyBridge. For Ovchinnik, the existence of these new products is “very important on the long-term horizon, although we may not see changes instantly.”
Related: Long-term? When Bitcoin plummeted, institutions held their ground
Competition for BTC ETF market share will intensify if the US SEC approves any of the several crypto ETF applications it has received. Until then, GBTC remains among the top indicators of institutional interest, with ETFs following on its heels and battling for the same market participants.
Also, since the GBTC remains closed for new investments until September this year, no drastic changes to the current GBTC discount are expected, but a streak of positive trends as noted between May 21 and 24 could bring good news. due to the lack of institutional demand. Sense in the market.