Capital Stops Flowing Why Wall Street Is Starting to Abandon Grayscale Bitcoin Trusts

Demand for grayscale bitcoin trusts is declining for several key reasons.

Capital Stops Flowing Why Wall Street Is Starting to Abandon Grayscale Bitcoin Trusts

There is a reason why Grayscale Bitcoin Trust (GBTC) has become the benchmark for measuring institutional interest in Bitcoin.

1
Grayscale is no longer the only option for investors
Grayscale Bitcoin Trust is one of the few products that provides hedge funds, endowments, pension funds, and family finance rooms with a way to invest in bitcoin without requiring users to hold this digital asset themselves.

As a result, capital flows into GBTC continue to increase. As reported last year, for example, Wall Street investors deposited approximately $18.2 billion in the fund, serving as a measure of growing institutional interest in the cryptocurrency industry. Conversely, a decrease in capital inflows reflects institutional withdrawals or profit-taking, such as has occurred since the first quarter of 2021.

(Note: Profit-taking, also known as technical corrections, is usually a trading practice in which holders of stocks or futures or options contracts actively change their positions to convert book profits into actual profits after the market value has moved and a price level has emerged in their favor.)

Skew, an on-chain analytics service, reported Thursday that GBTC will no longer attract new investment after February 2021. Capital inflows stopped when GBTC began trading at a negative premium to its net asset value (NAV). NAV represents the underlying market value of the assets held.

Capital Stops Flowing Why Wall Street Is Starting to Abandon Grayscale Bitcoin Trusts

As Grayscale Bitcoin Trust’s premium flipped into negative territory, capital inflows stopped. Source: Skew

Earlier this year, GBTC had a premium of 30%. However, the latest Skew chart shows its premium at -11.40%. Prior to that, GBTC’s premium to its net asset value reached -40.20%, the lowest level ever.

Meanwhile, GBTC’s premium recovered slightly in early April after Grayscale announced its intention to convert its trust structure to an exchange-traded fund (ETF). Grayscale made this decision as the new Canadian bitcoin ETFs launched at the time made competition increasingly fierce, mainly because they offered better expense ratios than Grayscale.

For example, Purpose, the world’s first physically settled bitcoin ETF, has an expense ratio of 1%. Other Canadian bitcoin ETFs such as Evolve and CI Galaxy offer expense ratios of 0.75% and 0.40%, respectively. Grayscale, however, has an expense ratio of 2%.

Also, commercial competition with Canadian bitcoin ETFs may have discouraged capital inflows into GBTC. in the case of Purpose, for example, the company has received $1 billion per month since its launch in February this year, a side-effect of the high demand for bitcoin investment products in the market, despite the significant drop in inflows into GBTC.

2
Musk Upsets Wall Street Bitcoin Investors
The spot price of bitcoin also moved higher during this period due to the Tesla CEO Elon Musk factor. The cost of buying a bitcoin climbed from a low of $38,057 on Feb. 8 to a high of $64,899 on April 14 after Tesla disclosed it held $1.5 billion worth of BTC on its balance sheet, leading investors to believe more companies would replace some of their cash holdings with bitcoin.

However, the premium on GBTC remained negative during Bitcoin’s price rise from February to April.

When bitcoin began to fall due to profit-taking, China’s cryptocurrency ban and rumors of a bitcoin sell-off at Tesla, the GBTC premium fell to a new all-time low of -40.20%.

Capital Stops Flowing Why Wall Street Is Starting to Abandon Grayscale Bitcoin Trusts

Accelerated Bitcoin correction sentiment after Musk criticizes cryptocurrency’s carbon footprint. Source: BTC/USD on TradingView

Daniel Martins, founder of independent research firm DM Martins research, highlighted the decline as an indication that Wall Street’s interest in Bitcoin-related investments is waning, especially after the cryptocurrency became the apparent victim of Musk’s anti-Bitcoin tweets in mid-May, which decimated Bitcoin’s valuation for a time.

Martins further noted that Grayscale reported an annualized return 500% higher than Nasdaq, but it also had a worse correction than in the 2008 recession – 82% for the former and 17% for the latter. This makes grayscale bitcoin investment products an “overleveraged bet” and comes with poor risk-adjusted performance.

He adds, “GBTC’s volatility is almost nine times that of the Nasdaq: 145% vs. 17%.”

3
Grayscale ETFs coming in 2021?
Martins’ statement highlights the possibility that the GBTC premium could face further downside as investors look for a more stable alternative to the ongoing price correction in Bitcoin.

In addition, its competition with other digital currency investment alternatives, including cryptocurrency custodian services that offer institutional investors the ability to hold real cryptocurrency assets at lower fees, further amplifies the risk of constrained capital inflows.

ETF.com analyst Sumit Roy wrote that the transition of grayscale funds to ETFs could end its era of charging 2% fees, as it needs to compete with an army of ETFs led by Bitwise, Vanguard, Fidelity, the Chicago Board Options Exchange (Cboe) and others.

“But no matter what happens, GBTC will be a force to be reckoned with and will continue to exist regardless of how the cryptocurrency fund space evolves.” He added.

Whether the U.S. market will get a bitcoin ETF in 2021, however, remains a mystery in itself. The Financial Times reported earlier this week that most ETF applications have been put on hold as SEC Chairman Gary Gensler reiterated concerns about investor protection in the cryptocurrency market.

Laura Morrison, head of global listings at the Chicago Board Options Exchange (Cboe), said, “I honestly expect delays in all of our filings.”

Posted by:CoinYuppie,Reprinted with attribution to:https://coinyuppie.com/capital-stops-flowing-why-wall-street-is-starting-to-abandon-grayscale-bitcoin-trusts/
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