Grayscale’s Bitcoin Trust GBTC discount status continues, a situation that presents unique and new challenges not only for investors, but also for Grayscale itself.
Grayscale Bitcoin Trust (GBTC) is a publicly quoted private bitcoin investment vehicle that has been providing investors with exposure to bitcoin (BTC) since 2013. However, compared to exchange traded funds, better known as ETFs, Grayscale Bitcoin Trusts differ significantly in terms of convertibility and liquidity.
In terms of organization, the trust is more like a company, or rather, a “closed-end fund” that can initially only be sold to qualified investors, at least in terms of regulatory form. This means that the number of GBTC shares available is limited, and retail traders can only access investment opportunities through the secondary market, in addition to GBTC shares not being convertible into native bitcoin positions.
Historically, GBTC has traded above the equivalent bitcoin price held by the fund in the past, due to excess demand from retail investors. In contrast, institutional clients appear to be somewhat “simple and brutal,” as their usual practice is to buy shares directly from the Grayscale Bitcoin Trust and sell them directly for a profit after a six-month lock-up period.
For most of 2020, Grayscale Bitcoin Trust shares will trade at a premium to their net asset value (NAV), ranging from 5% to 40%. However, this changed dramatically in March 2021 when Canadian regulators approved two bitcoin exchange-traded funds, resulting in a significant offset to the grayscale bitcoin trust premium!
Bitcoin Exchange Traded Funds are less risky and cheaper than trust funds. What’s more, bitcoin exchange traded funds have no lock-in period, which means retail investors can get the opportunity to buy shares directly at par. The result is clear: As better bitcoin investment vehicles emerge, the advantages and market appeal that the Grayscale Bitcoin Trust once had are fading.
Can the parent company save Grayscale?
Top: Grayscale Bitcoin Trust Fund Premium vs. NAV, source: Ycharts
Starting in late February, grayscale bitcoin trust fund premiums began to move into unfavorable territory as GBTC holders began scrambling to switch positions to avoid getting stuck in an expensive and non-redeemable hole. Even though the bitcoin price reached an all-time high in mid-March 2021, the bull market did not give GBTC holders enough confidence, ultimately resulting in discounts of up to 18% to the Grayscale Bitcoin Trust.
On March 10, 2021, Grayscale’s parent company, Digital Currency Group (DCG), announced plans to purchase approximately $250 million of outstanding GBTC shares, which Digital Currency Group reportedly did pursuant to Rule 10b-18 of the Securities Exchange Act of 1934. In accordance with Rule 10b-18 of the Securities Exchange Act of 1934, and in management’s judgment, Digital Currency Group ultimately decided to use cash on hand to fund the purchase transaction. Although Digital Currency Group did not specify the reasons behind this move, the excessive discount would undoubtedly have put pressure on the group’s reputation.
As the situation worsened, Digital Currency Group also announced plans to convert its Bitcoin Trust into a U.S. exchange traded fund, although no specific guarantees or cut-off dates have been communicated. on May 3, Digital Currency Group disclosed that as of April 2021 it had purchased $193.5 million worth of GBTC stock for $193.5 million as of April 2021, in addition to plans to increase GBTC stock repurchase potential to $750 million.
The problem, however, is that Grayscale Bitcoin Trust has $36.3 billion in assets under management, meaning that buying $750 million in GBTC stock is simply a drop in the bucket and hardly a relief from the discount dilemma it currently faces.
For Grayscale, there may now be some important questions to answer, such as
- Can the parent company, Digital Currency Group, actually mitigate the discount by buying back GBTC shares?
- Who exactly is desperately trying to sell GBTC shares?
- Will Grayscale actually convert the Bitcoin Trust into a Bitcoin exchange traded fund?
Is there any salvation for Grayscale in the future?
As the de facto controller of the management of the Grayscale Bitcoin Trust, the parent company Digital Currency Group does have the ability to purchase GBTC shares at market price and withdraw the equivalent value in bitcoin for redemption. It’s worth noting that this type of repurchase is actually profitable, as buying GBTC at a discount and selling bitcoin at market price always generates a profit and does so without much risk.
Other than some regular reporting of holdings, there is no way to know who has been selling GBTC at below NAV – but the “majority shareholders” of the Grayscale Bitcoin Trust, institutional investors with 5% or more However, neither BlockFi nor Three Arrows Capital, the “majority shareholders” of the Grayscale Bitcoin Trust, institutional investors with 5% or more of the shares, have reported reducing their positions in GBTC. In addition, investment manager Marlton has publicly supported Digital Currency Group’s buyback of GBTC.
“We support this move by DCG and believe it represents a more constructive approach to mitigating the significant discount between the market price and net asset value of GBTC shares. We continue to believe that GBTC maintains a competitive advantage as the world’s largest bitcoin fund and applaud GBTC for recognizing the need to take meaningful steps that are aligned with shareholder value creation and ensure the best path forward.”
In addition, Marlton has also been urging Grayscale Trust to modify GBTC’s trading method to a Dutch-style auction, and hopes to improve or even eliminate the negative premium issue in this way. From the above, it is likely that retail investors are now exiting the Grayscale Bitcoin Trust at all costs, but there is no way to confirm this at this time.
While it may seem like a good deal to buy GBTC at a 10% or higher discount at the moment, investors must remember that so far there is no way to get rid of these shares other than selling them on the market.
Posted by:CoinYuppie，Reprinted with attribution to:https://coinyuppie.com/grayscale-is-hard-to-save-whats-wrong-with-gbtc/
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