Bitcoin is having a tough few days. At its worst on Thursday, the price of the world’s top crypto had dropped 14% since last week — but Grayscale’s flagship fund is dropping even harder.
While Bitcoin bottomed at 14%, Grayscale Bitcoin Trust (GBTC) fell up to 22%. Bloomberg explained GBTC stock had been hammered by institutional buyers scrambling to offload their shares on the retail crowd.
GBTC is the largest Bitcoin fund. It controls nearly 655,000 BTC ($34 billion) — over 3% of the cryptocurrency’s total circulating supply.
Like Grayscale’s other products, GBTC allows accredited investors (read: big players) exposure to Bitcoin’s price without holding the actual asset themselves.
But aside from betting on Bitcoin’s price, GBTC has historically offered a profitable arbitrage opportunity for those with deep enough pockets.
GBTC shares are often worth more than the value of the fund’s Bitcoin. When this happens, cashed-up investors can capitalize (with a little patience).
- Borrow Bitcoin, give it to Grayscale in return for GBTC shares and a fee.
- Wait until the six-month lockup period expires.
- Sell the GBTC shares, pay back the Bitcoin loan, and profit the difference.
This trade relies on high demand for both Bitcoin and GBTC; the so-called “Grayscale premium” rises as GBTC stock goes up — which is inspired by demand for Bitcoin.
Everything’s chill while Bitcoin goes up
But a downturn in Bitcoin’s price can have a big effect on GBTC stock. If the Grayscale premium disappears while arbitrage traders wait for their lockup period to end — so too could their profits.
This is playing out right now: the Grayscale premium has flipped to a discount, rendering the move a losing strategy.
The thing is, retail buyers are the marks in Grayscale’s arbitrage trade. Regular investors simply don’t have the required $50,000 to unlock the GBTC discounts that make the trade possible.
And so, the retail pitch for GBTC becomes the ease and tax relief associated with a regulated investment vehicle like Grayscale (you can put GBTC in your IRA or 401(k), for example).
However, the difference between returns brought by holding GBTC stock over Bitcoin is now at its worst point in history.
Bitcoin holders have made about 670% on their investment in the past year. GBTC holders, on the other hand, made a little over 500%.
Zoom out and it gets worse for Grayscale Bitcoin Trust
The longer GBTC shares are held over Bitcoin, the worse it gets for our retail buyers (who’ve been able to buy GBTC stock since 2015).
In fact, if a retail buyer bought $10,000 worth of GBTC shares in 2015 and held until today, they’d be worth around $816,000 (up 8,160%).
But they’d be sitting on $2.18 million worth of Bitcoin if they’d just bought the crypto instead (up nearly 22,000%). That’s a difference of over $1.3 million.
Of course, these are just hypotheticals, and it’s unclear how commonly GBTC buyers hold their shares for that long.
But with open-ended Canadian Bitcoin ETFs already dampening interest in GBTC, Grayscale might need to offer incentives that don’t rely on exploiting the retail crowd every six months. A more competitive fee structure is one choice.
However, Grayscale CEO Michael Sonnenshein recently told CoinDesk the fund’s 2% annual fee would remain and chalked Grayscale’s largest discount in history to “selling pressure” from the sheer amount of GBTC shares created in recent months.
Analysts say Grayscale converting GBTC into an ETF would likely resolve their problems, but Sonnenshein reckons the SEC isn’t ready to approve one for US markets just yet.
Meanwhile, Wall Street giants Fidelity and Goldman Sachs have filed their own Bitcoin ETF applications with the SEC, alongside a raft of others hopefuls.