GBTC discount presents a unique challenge for Grayscale and investors
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GBTC (Bitcoin Investment Trust) is a bitcoin fund traded in the form of a OTC security. This means the trust trades over the counter and not as a stock, which means it is not listed on a stock exchange. This means investors do not have to go through the rigorous due diligence required by regular exchange based stocks. GBTC has been around since 2013 and is currently the only way for investors to gain exposure to Bitcoin without actually buying the cryptocurrency.
Two weeks ago, Grayscale Investments LLC, the manager of the GBTC Bitcoin Investment Trust and a subsidiary of Digital Currency Group, reported that it had halted redemptions for the fund in order to assess the tax implications for shareholders in light of a recent Internal Revenue Service (“IRS”) Notice. (GBTC is the fund that tracks Bitcoin, a cryptocurrency.) Shares of GBTC fell in the wake of the announcement, and the drop continued this week after the fund’s announcement that it would resume redemptions. The discount of GBTC to its net asset value (“NAV”) is currently around 54%.
Since 2013, the Grayscale Bitcoin Trust Fund (GBTC) has offered investors the opportunity to invest in bitcoin (BTC) through a privately held, exchange-traded instrument. However, the convertibility and liquidity of a trust are very different from those of an exchange traded fund (ETF).
Trusts are structured like corporations, at least in their regulatory form, and are closed-end funds that can initially be sold only to accredited investors. This means that the number of shares available is limited and retailers can only access them through the secondary markets. In addition, a GBTC share cannot be repurchased for the underlying BTC position.
In the past, GBTC traded above its BTC equivalent due to excessive demand from individuals. A common practice for institutional clients was to buy shares directly from Grayscale at par and resell them at a profit after a six-month lock-up period.
During most of 2020, GBTC shares traded at a premium to net asset value (NAV) ranging from 5% to 40%. By March 2021, however, the situation has changed dramatically. The approval of two bitcoin ETFs in Canada has made a significant contribution to GBTC’s premium redemption.
ETFs are less risky and less expensive than trusts. Moreover, there is no lock-up period and private investors can buy shares directly at par. Therefore, the advent of a better investment vehicle for bitcoin has taken away the appeal that GBTC once had.
Can the DCG save the GBTC?
Grayscale GBTC premium on intrinsic value. Source: Ycharts
In late February, the GBTC premium entered an unfavorable zone, and holders began frantically moving their positions to avoid getting stuck in an expensive and non-redeemable instrument. The situation deteriorated to a discount of 18%, despite the fact that the BTC price reached an all-time high in mid-March.
On the 10th. In March, Digital Currency Group (DCG), the parent company of Grayscale Investments, announced a plan to buy up to $250 million of outstanding GBTC shares. The conglomerate did not give a reason for the decision, but the excessive discounts could certainly damage the company’s reputation.
As the situation worsened, GDC announced a roadmap for converting its trust funds into U.S. ETFs, although no specific guarantees or timelines were announced.
The 3rd. In May, the company announced that it had purchased $193.5 million worth of GBTC shares through April. In addition, DCG has increased the potential to buy back GBTC shares to $750 million.
Given that the GBTC trust has $36.3 billion in assets under management, there is reason to believe that the purchase of $500 million in shares may not be sufficient to reduce the discount.
This raises a number of important questions. For example, could GDC lose money if it entered into such a deal? Who is selling desperately, and the move to ETFs is being analyzed?
As controller of the fund manager, the GDC can purchase units in the trust fund at the market price and withdraw the equivalent in bitcoins for redemption. Therefore, buying GBTCs at a discount and selling BTCs at market prices will systematically generate profits and there is no risk.
Apart from a few funds that regularly report on their holdings, there is no way of knowing who is selling GBTCs below net asset value. The only investors with 5% or more are BlockFi and Three Arrows Capital, but neither reported a reduction in their position.
So it could be that some retailers are leaving at all costs, but it’s impossible to tell at this point.
While buying GBTC at a discount of 10% or more may seem like a good deal, investors should keep in mind that there is currently no other way to get out of these stocks than to sell them in the market.
The views and opinions expressed herein are those of the author and do not necessarily reflect those of Cointelegraph. Every investment and every stage of trading involves risk. You should do your own research before making a decision.
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