The following is an excerpt from a recent edition of Deep Dive, Bitcoin Magazinethe premium markets newsletter. To be among the first to receive this and other on-chain bitcoin market analysis straight to your inbox, subscribe now.
The grayscale story is well known at this point. It is an open-ended trust that has found a workaround to the blatant regulations of the United States Securities and Exchange Commission (SEC) and found a way to provide bitcoin exposure to institutional capital and to brokerage accounts before almost everyone else.
You Should Give Credit Where Credit is Due: The GBTC product has been a huge success for Grayscale. The trust currently holds an incredible 651,884 bitcoin, or roughly 3.10% of all bitcoin that will ever exist.
During the final months of 2020, GBTC shares traded at a significant premium due to the structure of the trust.
With shares traded at a high premium, accredited and institutional investors could acquire GBTC shares at net asset value (net asset value), but those shares had to be blocked for six months before they could reach secondary markets.
Investors absolutely crammed into the trade, as the seemingly risk-free arbitrage was too appealing to be left out.
From June 18, 2020 to February 18, 2021, Graycale purchased an incredible 284,393 bitcoin. For context, this equates to 127% of bitcoin mined during the same time period.
On February 18, 2021, however, GBTC shares began trading at a discount to net asset value and, as expected, further GBTC share buybacks were completely halted. With one of the biggest buyers in the market sidelined, bitcoin lost momentum, but there is more to be said.
All of the GBTC shares that were repurchased and blocked for six months began to come into the market in waves, which created an unexpected development in the market.
During the rise, with the premium, Grayscale sucked in bitcoin as retail investors raised the price of GBTC shares in the secondary market, all of those stocks that are now trading below NAV most certainly siphoned off demand. bitcoin spot for the moment.
In the past seven days, the equivalent of 11,512 BTC of GBTC shares have been released, and some of them have undoubtedly been sold in the market. As an institutional allocator, if you want to be exposed to bitcoin, do you buy bitcoin for cash (which can still be very difficult, with many legal and regulatory hurdles to overcome), or buy yourself shares of GBTC that are trading at a 10% to 20% discount on the net asset value?
It’s a no-brainer, and the reality is that this dynamic has removed a lot of buying pressure in the market.
Over the next two months, the equivalent of 82,818 BTC of GBTC shares will be unlocked, and as long as GBTC continues to trade below NAV (which should be quite expected), much of the demand for bitcoin will go to GBTC, which will not be reflected in the price of bitcoin.
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