What’s the deal with the Grayscale Crypto Investment Trusts?

Most institutional investors participate in crypto-asset markets through investment funds like Grayscale Investment’s closed-end trusts. As publicly traded trusts that report to the U.S. Securities and Exchange Commission, they relieve investors of concerns about storage, custody and security of their holdings. Grayscale is the dominant crypto fund manager with over $37 billion assets under management. This blog explores some of the market dynamics associated with the Grayscale Bitcoin Trust (GBTC).

For example, Grayscale Bitcoin Trust (GBTC) has accumulated more than 3% of total Bitcoin supply, and an even higher proportion of liquid supply.  (Glassnode analysis found that only 22% of outstanding Bitcoin are considered liquid, i.e., currently in constant circulation and available for trading.)  Grayscale also runs eight other single-asset crypto trusts and recently incorporated twelve more such trusts although they have yet to launch. However in this post we’ll focus on GBTC.

Although accredited investors can buy GBTC directly from Grayscale at NAV, many institutional investors cannot take this route because GBTC shares have a six-month lock up period. (According to SEC Rule 144, restricted securities issued by an SEC reporting company like GBTC are subject to a minimum holding period of 6 months.) Hence, these investors are forced to buy the shares at a premium over the native asset value (NAV) in the secondary market, and these premia can be significant:

Source: https://ycharts.com/companies/GBTC/discount_or_premium_to_nav

Price premia over NAV occasionally appear on exchange-traded funds (ETFs) but they rarely exceed about 3%. When they do, authorized participants step in to arbitrage the gap away by creating or redeeming shares of the ETF.

However, some have pointed to a scheme by which the premium could be arbitraged. It involves buying GBTC directly from Grayscale at NAV and shorting free-trading GBTC. Six months later, the two positions net out leaving a risk-free profit. This glosses over risks like not being able to borrow and fund GBTC for up to six months. JP Morgan analysts have estimated the cost of this premium monetization trade at 10-15% per annum. The GBTC long position could also be hedged with BTC futures contracts. However, the fact that the premium continues to exist, implies that such arbitrage is not consistently taking place.

That same JP Morgan analysis concluded that the introduction of a U.S. Bitcoin ETF would be positive for Bitcoin over the longer term but could be short-term negative. It would erode GBTC’s effective monopoly status and could cause a cascade of GBTC outflows and a collapse of its premium. This could have negative near-term implications for Bitcoin given the flow and signaling important of GBTC. And some think that the chances of the SEC giving the green light to a Bitcoin ETF is looking good.

There are  two active Bitcoin ETF filings with the SEC: VanEck Bitcoin Trust (submitted in December) and Valkyrie Bitcoin Funding (January 22). In the past, there have been many unsuccessful attempts, all of which were rejected by the SEC on the grounds that the underlying crypto-assets are too subject to market manipulation and liquidity is insufficient. However, some are heartened that SEC Director of the Division of Investment Management Dalia Blass, who oversaw the rejections, is stepping down, and Gary Gensler, President Biden’s nomination as SEC Chairman, is known as very crypto savvy.

Meanwhile, Grayscale competitors are sprouting up. Osprey Bitcoin Trust launched with a 0.49% management fee (versus GBTC’s 2%). BlockFi and Bitwise have followed suit with similar offerings. However, the business models of Grayscale and all such funds hang on whether the SEC will continue to push back on crypto-asset ETFs.

4 thoughts on “What’s the deal with the Grayscale Crypto Investment Trusts?

  1. From Coinmetrics: “Institutional investors can take advantage of the Grayscale Bitcoin Trust premium by simultaneously depositing BTC into the trust (in exchange for GBTC shares priced at NAV) while shorting BTC on CME. This allows them to remain market neutral and pocket the premium on GBTC. This dynamic has created a vortex that has drawn a large amount of BTC into the Grayscale Trust supply sink.” https://coinmetrics.substack.com/p/coin-metrics-state-of-the-network-452

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  2. New York Digital Investment Group (NYDIG) joined the crowd and registered with the U.S. Securities and Exchange Commission (SEC) for a Bitcoin exchange-traded fund (ETF). The firm, a Bitcoin-centric subsidiary of Stone Ridge Asset Management, joins Valkyrie Digital Assets and Vaneck that have already submitted their bitcoin-based ETF filings. Morgan Stanley would act in the capacity of an initially authorised participant and the Delaware Trust Company would be the trustee. However, the SEC is yet to approve a Bitcoin ETF on concerns around Bitcoin’s volatility, and its high potential for price manipulation. https://www.sec.gov/Archives/edgar/data/1843021/000119312521043521/d242572ds1.htm

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  3. “After a month of headlines about its flagship product, the Grayscale Bitcoin Trust (GBTC), trading with a negative premium, the world’s largest crypto exchange-traded product (ETP) provider is fighting back. In a post earlier this week, the global market leader with a little more than 75% of all $61 billion in ETP crypto assets under management announced that it will convert the GBTC in an exchange-traded fund “when permissible,” meaning when the SEC is ready to approve its first bitcoin ETF.” https://www.forbes.com/sites/javierpaz/2021/04/08/will-grayscale-plan-to-convert-gbtc-to-a-bitcoin-etf-work

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