- The Grayscale Bitcoin Trust has been trading at a huge premium for the past five years, soaring to 132% in March 2017.
- Analysts worry that this could be a sign of declining interest in the Trust which could have a huge effect on Bitcoin prices as Grayscale is the biggest BTC buyer in the market.
The largest Bitcoin trust in the market is trading at a discount for the first time in five years. The Grayscale Bitcoin Trust (GBTC) has received great popularity among institutional investors who seek to get into cryptocurrencies. This has driven up the premium over the past, with its shares at one time trading 132% above the BTC market price. Yesterday, this all changed.
GBTC first launched in 2013 as the Bitcoin Investment Trust, a product of the Digital Currency Group. It allows investors to get exposure to Bitcoin via an open-ended private trust without directly purchasing the cryptocurrency. These investors buy shares in GBTC, either via cash or BTC. These shares usually trade at a price higher than the market price of BTC. Once the lockup period ends, they can sell these shares to other investors, profiting from the usual high premiums at the time of sale.
However, according to financial insights firm YCharts, the premium turned negative yesterday. The shares were trading at a 0.68% discount. For reference, on May 31, 2017, the premium was as high as 132.6%. The average premium stands at 37.97%.
The Grayscale $GBTC premium is now negative for the first time since 2015. ?
Sustained GBTC discounts could cause real pain across crypto lending markets. pic.twitter.com/at4MNak3jW
— Ryan Selkis (@twobitidiot) February 24, 2021
GBTC shares have since recovered and at press time, they were trading at a 3.10% premium.
Should investors be concerned?
Grayscale is arguably the most influential firm in the digital assets industry. It currently has over $31 billion in BTC under management in its GBTC Trust. This equates to 649,130 BTC or roughly 3.09% of all BTC in supply. Grayscale is also the largest buyer of BTC on the market.
According to JPMorgan analysts, Grayscale has been the key mover of the BTC market, sparking the current surge. The analysts observed that the firm’s purchases “are too big to allow any position unwinding by momentum traders to create sustained negative price dynamics.”
When its GBTC Trust started trading at a discount, analysts were instantly concerned, and rightly so. The cryptocurrency critics were quick to claim that this spelled doom for Bitcoin. Peter Schiff, fierce Bitcoin critic was among the first to point this out. He took to Twitter to claim that Bitcoin’s price would tumble due to a lack of buying pressure.
The @Grayscale Bitcoin Trust has traded at a discount to NAV all day. If this persists the Trust will have no more inflows and will therefore not be buying any more #Bitcoin. Without Grayscale, the biggest daily buyer, where will the new buyers come from to support the price?
— Peter Schiff (@PeterSchiff) February 23, 2021
Dan Morehead, the CEO of Pantera Capital, also believes that this could have an effect on the market. He pointed out that no investor wants to buy an investment product that they will sell at a discount.
“If you buy it at a 20 percent premium then sell it at 5 percent, it’s not such a great trade,” he told the Financial Times.
Aside from buying the largest stash of BTC, Grayscale also boosts the cryptocurrency’s price by ensuring investors can’t panic-sell. Investors must lock up their BTC for six months before they get the opportunity to cash out. Even then, they can only sell their GBTC shares to other investors. The BTC is left intact.
David Fauchier, a fund manager at Nickel Digital captured it, stating, “Grayscale is Hotel California at the moment. Bitcoin can flow into Grayscale but not out. You sell the shares after six months, buy or borrow bitcoin and do it again.”