Grayscale Investments’ GBTC might be the absolute market leader but it is currently trading below fair value as the TSX Purpose Bitcoin ETF is seeing record inflows.
Grayscale Bitcoin Trust ($GBTC) is currently the largest listed cryptocurrency asset with $30.17 billion in assets under management. The firm currently holds more than 655,730 BTC and the security is tradable in the United States through over-the-counter markets.
How is GBTC different from a Bitcoin ETF?
The fund was launched in 2013 and the Grayscale Bitcoin Trust became the preferred institutional vehicle in the U.S. for BTC due to the lack of a Bitcoin exchange-traded fund (ETF).
Investment trust funds are regulated by the U.S. Office of the Comptroller of the Currency (OCC) and they are designed exclusively for accredited investors. Nevertheless, those can be sold to retail traders after a six-month lock-up period.
This specificity causes GBTC shares to trade above the equivalent BTC held by the trust whenever there’s retail demand on secondary markets. Meanwhile, institutional clients can buy at par directly from Grayscale Investments regardless of the price on OTC markets.
As displayed above, such a premium sometimes surpassed 40%, indicating heavy buying pressure from investors. The situation changed over the past four weeks as Bitcoin price peaked at $58,000 and initiated a substantial correction, causing the GBTC premium to range between 5% and 10%.
A diminished appetite in the secondary markets creates a potential imbalance as there is currently no redemption program for the GBTC. Had there been a way to convert it back to BTC, a market maker would gladly buy the trust shares at a discount.
Although the recent price crash could explain the 7% discount seen on Feb. 26, Bitcoin faced multiple 30% corrections in the past with no apparent impact on GBTC premium. Even during the horrific bear market in late 2018, GBTC traded above the net asset value (NAV).
A new challenger appears
Although no better alternative was previously offered, Canada’s TSX launched a Bitcoin ETF on Feb. 18, providing investors direct exposure to BTC. This structure allows the market maker to create and redeem shares, thus minimizing eventual premium or discount to the net asset value.
This time around, the selling pressure that took place found less buying activity from non-accredited investors. On the other hand, the Canadian Purpose Investments ETF surpassed 10,000 BTC under management in one week, which signals the instrument’s success despite a sharp downturn in BTC price.
Unless Grayscale Investments opens a redemption program, nothing is preventing GBTC from continuing to trade below its net asset value.