GBTC Premium Becomes Discount, Bitcoin Price Trend Remains Sluggish?

GBTC is one of the top indicators of institutional interest, but ETFs will follow suit, vying for the same market participants

Bitcoin is once again facing an upside impediment after briefly crossing the $40,000 mark on May 26. Currently, bitcoin’s price is hovering around $36,000, down 44% from its all-time high of $64,889 on April 14. One of the key points affecting macroeconomic conditions across the cryptocurrency market is institutional demand.

One of the key investment vehicles for institutional demand is the Grayscale Bitcoin Trust (GBTC), or grayscale bitcoin trust. This trust allows investors to access bitcoin through regulated traditional investment vehicles without having to directly purchase, store and hold tokens.

GBTC is publicly traded on the OTCQX, an over-the-counter marketplace where stocks can be traded. GBTC is currently trading around $30, down nearly 46% from its all-time high of $58.22 on Feb. 19.

Each share represents 0.00094716 BTC and tracks its market price, excluding applicable fees and expenses. GBTC has a minimum holding period of six months, while the minimum investment requirement is $50,000, making it not well suited for retail investors.

Grayscale Bitcoin Trust Premiums Have Been Negative for Three Months

Due to the impact of institutional demand in support of greyscale and the fact that it is a regulated way to gain exposure to bitcoin, its products typically trade at a premium to net asset value (NAV), or the current value of holdings. the GBTC premium is the difference between the value of bitcoin assets held by a greyscale trust and the market value of those holdings.

GBTC Premium Becomes Discount, Bitcoin Price Trend Remains Sluggish?

This difference was always positive until February 23 of this year and hit an all-time high premium of 122.27% four years ago, on June 6, 2017. However, since the end of February this year, the premium turned into a discount and reached an all-time low of -17.89% on May 16.

Since this difference is driven by supply and demand factors in the market, an increase in the GBTC premium indicates an increase in bitcoin inflows into the trust, while a decrease in the premium and transition to a discount indicates a decrease in bitcoin inflows, resulting in GBTC trading at a discount to the spot price of bitcoin.

Cointelegraph spoke with Nikita Ovchinnik, chief business development officer at decentralized exchange 1inch Network, about the impact of the changing GBTC premium trend. ovchinnik said, “It looks like the GBTC premium is a very good indicator of market sentiment in the medium term. The premium was negative at the end of April, and while digital assets experienced a partial boom, the lack of institutional interest foreshadowed a shrinkage in market capitalization in May.”

This trend is consistent with the amount of bitcoin held by Grayscale Trust, as it has been gradually increasing since January 13 and reached an all-time high of 655,702.89 bitcoins on March 2. Since then, its bitcoin reserves have begun to decline for the first time ever, and as of June 4, it held 652,410.55 bitcoins, with assets currently under management of $24.27 billion.

GBTC Premium Becomes Discount, Bitcoin Price Trend Remains Sluggish?

Premiums allow investors to earn through arbitrage. One way to do this is to borrow bitcoin and use it in exchange for shares of GBTC. Once the six-month lock-up period is over, investors can then sell their shares on the secondary market at the prevailing premium.

Through this process, the investor will pocket the price difference generated by the premium and thus successfully arbitrage.

“GBTC is one of the safest and most convenient ways for institutional funds to invest in Bitcoin. It looks like their demand was one of the early drivers of the market in 2021, but (today) it’s slowing down and we no longer hear new entities claiming they decided to diversify and try to hold blockchain assets.”
In traditional financial markets, the premium/discount of GBTC can be compared to the pricing of closed-end mutual funds. Ideally, since the amount of bitcoin in the trust is publicly disclosed, the value of the trust should also be right at market value. However, the value will often be different due to the premium/discount factors mentioned above.

Bryan Routledge, an associate professor of finance at Carnegie Mellon University’s Tepper School of Business, told Cointelegraph that “the premium reflects its status as a ‘regulated’ alternative to bitcoin,” and therefore “investors will pay a premium for access through the trust.” Routledge added that the premium for GBTC should not be considered an additional cost.

“If you buy and sell, the premium is the same and the impact is minimal. Recently, there are easier and more comfortable ways to access bitcoin, so the premium for graying has gone down. It is now at a discount relative to the net value of bitcoin.”
While GBTC is trading at a discount relative to NAV, there are some positive signs in the recent trend. Between May 21 and May 24, GBTC’s discount rebounded sharply from -21.23% back to -3.86% before dropping back down to around -12% on June 3. This indicates an increase in institutional interest between these days.

The direction of movement of the GBTC premium/discount can be used as an indicator of market sentiment for the asset, especially by institutional investors.

Bitcoin ETFs are competitors to GBTC

In addition to GBTC, another way for institutional and retail investors to access bitcoin price volatility through regulated channels is through bitcoin exchange traded funds (ETFs).

Purpose Investments launched the first North American bitcoin ETF on February 18 of this year, and its assets under management (AUM) rose to more than $500 million within a week, before topping $1 billion within the same month. As of June 4, the ETF’s AUM now stands at $714.6 million, or 19,407.63 bitcoins, under the ticker symbol BTCC.

In addition to Purpose’s BTC ETF, Evolve ETFs launched its own bitcoin ETF on Feb. 19 under the ticker EBIT. While it lost the first-mover advantage that Purpose’s ETF gained, it currently has $78.52 million in assets under management, slightly more than the 12% of BTCC’s current AUM. Overall, there are several noteworthy ETFs on the TSX.

What’s notable about these ETFs is that they were launched at the exact same time that the GBTC premium turned into a discount, and Routledge mentioned the reason for this occurrence, saying, “ETFs are a cheaper (in terms of transaction costs, fees) way to get bitcoin. So the premium for greyscale has gone down. And that reflects good old-fashioned competition.”

The GBTC Trust has a 2% management fee, compared to 1% for the Purpose BTC ETF and an even lower fee of 0.75% for the Evolve ETF. Due to the success of existing Canadian ETFs, the allure of the ETF market is so strong that even Grayscale has confirmed that it will convert its products to ETFs.

But before that, they need to get approval from the US Securities and Exchange Commission. Several companies have already filed for this, including Fidelity and SkyBridge, and Ovchinnik says the existence of these new products is “important in the long-term context, although changes may not be seen immediately.”

If the SEC approves any of the several cryptocurrency ETF applications it has received, the competition for bitcoin ETF market share will begin to heat up. Until then, GBTC remains one of the top indicators of institutional interest, but ETFs will follow suit, vying for the same market participants.

Also, the current GBTC discount is not expected to change drastically as GBTC remains closed to new investment funds until September of this year, but the string of positive trends noted between May 21 and May 24 may bring good news to the lack of institutional demand felt in the market.

Posted by:CoinYuppie,Reprinted with attribution to:
Coinyuppie is an open information publishing platform, all information provided is not related to the views and positions of coinyuppie, and does not constitute any investment and financial advice. Users are expected to carefully screen and prevent risks.

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