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Grayscale GBTC's negative premium hits a new high.What impact will it have on the market after being converted into an ETF?



As the world's largest encrypted asset management company and the largest buyer of Bitcoin, Grayscale's every move has attracted much attention.

On the evening of April 5th, Grayscale released a blog post "Grayscale's Intentions for a Bitcoin ETF", stating that it plans to convert the Bitcoin Trust (GBTC) into a Bitcoin ETF, and the conversion time depends on the regulatory environment.

What happens when GBTC is converted into a Bitcoin ETF? Combined with the continuous negative premium of Grayscale Bitcoin Trust for nearly a month, what is the relationship between the two? What effect does a negative premium have on the Bitcoin market?

Grayscale Product Introduction

Grayscale Investment is a subsidiary of the US Digital Currency Investment Group (DCG) established in 2013. It specializes in managing encrypted asset trust funds. It mainly provides services for institutional investors and high-net-worth qualified investors through compliant fund operations. .

To put it simply, what Grayscale Trust does is to provide a compliant Bitcoin investment channel, accept investors' funds, which can be legal currency or cryptocurrency, based on the corresponding encrypted asset share, and then distribute trust shares as assets Evidence of interest. When investors no longer want to hold the equity, they can transfer trust shares through the secondary market.

Currently, Grayscale has launched a total of 13 mainstream digital asset trust funds including BTC, ETH, ETC, BCH, FIL, XLM, BAT, LTC, MANA, ZEC, ZEN, LINK, LPT, etc., as well as a large-cap index fund. Among them, the Grayscale Bitcoin Trust (GBTC) is currently the largest Bitcoin fund in the world, holding approximately 654,421 Bitcoins with a market capitalization of $38.1 billion.

Since November 1, ARK funds have bought over 1.09 million shares of Grayscale GBTC: Jinse Finance reported that ARK Fund holdings data show that since November 1, ARK funds have purchased a total of 1,095,314 shares of Grayscale GBTC. At current prices, it's worth about $8.8 million. As of Friday’s close, GBTC closed at $8.03.

Jinse Finance previously reported that the grayscale GBTC negative premium rate exceeded 50%, a record low. [2022/12/12 21:37:46]

On September 25, 2013, Grayscale established the first Bitcoin Trust Fund (GBTC) in the market, and obtained the private placement exemption registration of the US Securities and Exchange Commission (SEC) in that year, and obtained the US Financial Industry Regulatory Authority (FINRA) in 2015. ) approved for listing.

GBTC is currently the only investment product that can be traded in the US stock secondary market and track the price of Bitcoin. It is also the only product that can buy Bitcoin exposure in the US pension plan.

Although currently only GBTC and ETHE are SEC reporting companies, Grayscale adopts the same business model for all existing products (as shown in the figure below): initiate private placement, obtain public quotations in the secondary market, become an SEC reporting company, and convert to ETF.

Data: Grayscale’s GBTC premium rate has narrowed slightly, currently at -39.2%: Jinse Finance reported that the data shows that the negative premium rate of Grayscale’s investment in Bitcoin Trust Fund (GBTC) has narrowed slightly, and the current premium rate is -39.2%. It had previously fallen as low as -45%. In addition, the current ETH trust premium is -40.19%. [2022/11/25 8:06:09]

Currently, different Grayscale products are in different stages of their life cycle (as shown in the figure below), and the aim has always been to convert these products into ETFs when conditions permit.

As of April 5, 2021, Grayscale's total assets under management reached US$46.1 billion, an increase of 53.67% compared to US$30 billion at the beginning of the year. This growth momentum points to growing interest from institutional investors.

GBTC and Bitcoin ETF

So, why is Grayscale converting the Bitcoin Trust into an ETF? Here we will talk about the current development and premium of Bitcoin ETFs, and what is the difference between GBTC products and ETFs.

Since October 1, ARK funds have bought a total of 33,763 shares of Grayscale GBTC: Jinse Finance reported that ARK Fund holdings data show that since October 1, ARK funds have purchased a total of 33,763 shares of Grayscale GBTC. As of Friday’s close, GBTC closed at $11.16. [2022/10/16 14:29:14]

At the beginning of 2021, Canada approved two Bitcoin ETF funds in a row, which once again aroused the market's attention and heated discussions on ETFs. Among them, the Bitcoin ETF (BTCC) of The Purpose Investments has inflowed 848 million US dollars since mid-February, which is eroding the market share of Grayscale GBTC. In the face of the continuous emergence of competitive products, Grayscale seems to be aware of this crisis. In addition, many people in the industry believe that this will put pressure on the US SEC to change its position. As the time matures, Grayscale decided to join the competition. Plan to convert GBTC into Bitcoin ETF.

(Note: Grayscale originally submitted an ETF application in 2016, and spent most of 2017 in dialogue with the SEC, but eventually withdrew the application. Because the regulatory environment for digital assets at that time had not yet developed enough to successfully promote this product to the point of the market.)

As for what will happen when GBTC is converted into an ETF?

First of all, for investors, Grayscale stated that shareholders of publicly traded GBTC shares do not need to take any action, and the management fees that need to be paid after converting to Bitcoin ETFs will be reduced accordingly. Secondly, for Grayscale itself, on the one hand, it can alleviate the current severe negative premium situation, and on the other hand, it can occupy an absolute leading position in the ETF market by virtue of its liquidity. Finally, for the encryption market, more institutional and retail investors and funds pour in through Grayscale, which can support BTC to go further and healthier.

The US SEC postpones the decision to convert Grayscale GBTC to Bitcoin ETF: On February 5th, the US Securities and Exchange Commission (SEC) once again postponed whether to approve the conversion of Grayscale Bitcoin Trust (GBTC) into a Bitcoin exchange-traded fund (ETF). ), citing widespread concerns about manipulation, liquidity and transparency. In a notice published Friday afternoon, the SEC expressed concerns about how the digital asset manager intends to convert its GBTC into a spot ETF. That said, regulators do not believe that Grayscale’s proposal is designed to prevent alleged fraud and manipulation in the bitcoin market. The SEC has invited public comment on the issues and has given interested parties 21 days to respond in writing. (Cointelegraph) [2022/2/5 9:32:28]

To better understand this, let's talk about the difference between Bitcoin ETF and GBTC.

ETF (Exchange Traded Fund) is a trading open-end index fund, which is an open-end fund that is traded on an exchange and has a variable fund share. The price of an ETF fund needs to be strictly anchored to a certain type of index/asset price. A bitcoin ETF, or bitcoin exchange-traded fund, is a fund that tracks an index of bitcoin prices.

GBTC is a closed-end fund that invests exclusively in Bitcoin, commonly known as an investment trust. The number of shares available to such funds is limited, and the price of their shares floats freely, and the shares may be higher or lower than the bitcoin they represent. When it is higher than the value of the bitcoins it holds, it is called a premium, and when it is lower than the value of bitcoins, it is called a discount (discount).

Data: The premium rate of Grayscale GBTC has remained negative for 17 consecutive days: Skew said in a tweet that the premium rate of GBTC, the most popular product of Grayscale, has remained negative for 17 consecutive days. ([2021/3/19 19:01:54]

What both GBTC and Bitcoin ETF have in common is that they both provide investors with a compliant channel to invest in Bitcoin, without the need to actually purchase and keep Bitcoin assets, and without taking the risk of key storage, but can also obtain investment Bitcoin earnings.

The difference between Bitcoin ETF and GBTC is:

1. ETF allows market makers to create and redeem stocks at will, GBTC does not allow redemption during the duration, and the realization of fund shares must be done through secondary market transactions. 2. GBTC has a 6-month lock-up period, and there is usually a premium. ETFs have better liquidity, and there is usually no premium or discount. 3. GBTC transaction costs are high, involving broker fees, annual management fees (2%), and premiums. Bitcoin ETF fees are lower, some 1%, or even lower (0.4%). 4. GBTC investment threshold is high, only open to qualified investors, and the minimum is 50,000 US dollars. Bitcoin ETFs have fewer restrictions on investors and investment amounts.

GBTC trading information on OTCQX (the over-the-counter market for US securities exchanges)

Compared with Bitcoin ETF, the advantage of investors choosing GBTC may be that they can avoid capital gains tax. Therefore, in general, Bitcoin ETF will obviously be more popular because it has higher transparency, stronger liquidity, lower threshold and redemption risks, and is easier to be accepted by mutual fund managers and pension funds.

Impact of Negative Premium

Let’s talk about the negative premium of Grayscale GBTC.

Since GBTC does not have a redemption process, GBTC holders have no way to convert their shares into Bitcoin, plus there is a lock-up period of up to 6 months, and the demand for purchases is strong, making the price of GBTC usually have a clear price with its net asset value difference. The long-term premium rate of GBTC remains above 15-20%.

GBTC can be purchased in the primary market and traded in the secondary market at the same time. There are two prices generated by this mechanism: real-time net value and real-time market price. The GBTC premium is the difference between the price of Bitcoin implied by the cost of share of publicly traded GBTC and the price of Bitcoin traded in the secondary market.

For example: on April 7, the closing price of GBTC stock was $50.62, while the actual Bitcoin price per GBTC share was $55.23 per share. This means that GBTC shares are currently trading at a discount price equivalent to 91.7% of its net asset value (NAV), which means that GBTC currently has a negative premium of 8.3%.

On February 23, GBTC experienced a negative premium for the first time since 2015. After nearly a month, GBTC has maintained a negative premium, and even reached a record high of -14.31% on March 24. This has caused some concerns in the market, and some analysts believe that this is a turning point for the market and not a good thing.

There may be two reasons for the continued decline in premiums: 1. GBTC in the primary market is released upon expiration but has no redemption mechanism. Under the arbitrage demand, the selling pressure in the secondary market has increased, resulting in a downward premium; 2. Competing products of the same type, such as Canada Multiple Bitcoin ETFs launched, reducing demand for GBTC.

So what is the impact of a negative premium? Will it directly affect the price of Bitcoin?

The continued negative premium will indeed eliminate the huge arbitrage space that GBTC has always had, and it means that GBTC is now always trading below the value of the underlying assets it holds, which is likely to lead to lower institutional demand for GBTC, which directly leads to grayscale Bitcoin purchases have slowed.

If the US SEC approves the first Bitcoin ETF, Grayscale GBTC products may be gradually marginalized. And that’s why Grayscale is considering converting GBTC into a Bitcoin ETF.

Of course, there is no need to worry too much about this. The decline in the GBTC premium is because trading institutions are cashing in the premium, which does not necessarily directly mean that the market is bearish or capital outflows.

Grayscale has taken some measures to remedy the negative premium. For example, Grayscale’s parent company DCG announced on March 10 that it plans to purchase USD 250 million in GBTC, but it does not seem to be very effective.

In the face of fierce competitors, Huidu, which used to be "dominated by one family", has come to a fork, and it is urgent to find new ways to change the status quo. Bitcoin ETF seems to be the best choice for Grayscale at present. Recently, Grayscale has been recruiting ETF-related positions, including ETF compliance officer, ETF product development expert, ETF sales director, etc., indicating that Grayscale’s next goal is ETF.


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