[ad_1]
Grayscale’s Bitcoin Trust (GBTC) re-hit the headlines yesterday with its record one-day addition of 16,244 bitcoins, adding to its stack of over 630,000 bitcoins and assets under management (AUM) totaling around 23 billion. of dollars. Obviously, the business is good. So who are the investors in Grayscale? Is the GBTC bounty an incentive or a deterrent? And where will this fund evolve in the future?
What is GBTC?
Grayscale has bitcoins in its GBTC trust, and investors buy stocks that represent a number of these bitcoins. A management fee of 2% per year is added to a “premium”. The premium is the difference between the underlying value of bitcoin (native asset value or “NAV”) and the market price of the holdings (what stocks cost).
There are two levels of investors. There are the core investors – accredited investors selected to buy into the fund’s private placement at the ‘NAV’ price, which is the price of the underlying bitcoin value. Base layer investors can send USD or Bitcoin and receive a number of shares equal to the value of bitcoin (it is currently 0.00094919 BTC / share).
Another key problem is that it is one way. Once you have placed bitcoin in the trust, it cannot be withdrawn. Investors can sell their stocks, but bitcoin will remain trusted and out of the market.
“Grayscale Bitcoin Trust does not currently operate a trading program and may interrupt creations from time to time. There can be no assurance that the value of the shares will come close to the value of Bitcoin held by the Trust and shares may trade at a substantial premium or reduction over the value of Bitcoin in the Trust. The Trust may, but will not be required to do so, seek regulatory approval to implement a buyback program. “
Small print from Grayscale website
Base layer investors have a six-month lock-up before they can sell their stocks in the open market to the second layer of investors. These secondary investors must pay the highest market price for the shares. Again, the “premium” is the difference between the price of shares in the open market and the stocks underlying the price of bitcoin.
What are Grayscale investors doing?
The biggest investor is Three Arrows Capital, which recently increased a position from $ 259 million to $ 1.4 billion (or roughly 6% ownership in the trust). He is one of the investors who is taking advantage of the recent transaction by presenting himself as a private placement at the base layer of the fund.
By investing at NAV, at the base layer, his shares are locked in for six months, but then he can sell the shares at the higher market price, locking in the premium. The premium historically remains around 20%, but can pump in a bull market where demand for stocks is high. For example, it exceeded 40% in December 2020.
Another investor benefits? BlockFi, which owns around 5% of the shares in the trust. Blockfi will give you around 6% return when you loan it your bitcoin, as it can then loan your bitcoin to groups like the Grayscale Trust. In this case, he lends the bitcoin in grayscale and enters the fund where he can take advantage of the premium.
For second tier investors who buy stocks in the open market, the premium is an amplifying risk. If bitcoin dips sharply, the losses will be deeper because you have a drop in the NAV (price of bitcoin), as well as a drop in the premium you bought. Likewise, if you buy before a bull market and a corresponding premium pump, your gains could be larger.
Why the premium? It is the market gap between supply and demand. Demand for shares exceeds supply as new shares are continually created but are delayed by the six-month block. Conversely, ETFs control premiums because new stocks can also be created continuously, but they do not have a lock-up and can be traded immediately. Premiums can be arbitrated.
Is the premium worth it?
Why do small secondary investors accept this GBTC premium risk over a pure bitcoin purchase?
On the one hand, you can buy it easily with your traditional brokerage account. Second, you avoid personal custody. Third, there are tax benefits as it is eligible for IRA. And four, if you think there is a bull run coming up, you can enjoy a premium pump.
Accredited investors obviously have a strong incentive with the premium to go into private placement, but it’s more than that. For some institutional investors, GBTC is one of the few ways to gain bitcoin exposure. Many investment funds have charters governing direct investments in cryptocurrencies and / or they don’t want to have to manage bitcoins. But basically anyone is able to invest in publicly traded assets, like GBTC, in order to get the best of both worlds. Their internal regulations allow it and they avoid having to self-guard.
But it won’t last forever. As the market matures and there are more options for trading bitcoin in a public market (like a bitcoin ETF), there will be fewer secondary investors willing to pay the premium and the premium will drop for meet weaker demand. When this happens, GBTC will likely reduce its above average management fee by 2% and file an ETF conversion request.
Overall, the GBTC premium occurs in the secondary market and offers very attractive trading for accredited investors who can join the private placement and invest at the net asset value of Bitcoin at the basic level of the fund. However, this premium will start to disappear as the market matures and more and more options for trading bitcoin in the public market emerge.
This is a guest post by Ellie Frost. The opinions expressed are entirely their own and do not necessarily reflect those of BTC Inc or Bitcoin Magazine.
[ad_2]
Source link