Before understanding GBTC premium, it is important to have a brief overview of Grayscale Bitcoin Trust.
GBTC: An Overview
Since cryptocurrencies have become quite mainstream, investors are curious whether it is possible to invest in Bitcoin through the stock market. The answer is that it has limited options until recently. GBTC aims to provide one such platform.
What Is the Grayscale Bitcoin Trust?
In 2013, the GBTC was launched as the Bitcoin Investment Trust (BIT) since the platform has matured enormously. GBTC is a New York-based company that provides investors BTC exposure through a trust that directly lists on the U.S stock market.
As of now, there are as such no regulation in the U.S that allows direct trading of crypto via the stock market since they believe the digital currencies are not adequately regulated.
GBTC: How Does It Work?
Although GBTC aims to make investing in Bitcoin through funds accessible to as many investors as possible, the reality is much different. Let’s see how it works!
First, Grayscale collects funds from wealthy investors to provide cash for funds and then buys Bitcoin from these funds. Next, Grayscale lists these funds on public stock exchanges where anyone can buy or sell shares.
The funds track this price as the Bitcoin price fluctuates, i.e., increases or decreases. It means that both the fund and shares track the price of BTC. Now, this allows investors who contributed to the fund at the beginning of the initial private round to earn a direct return on reselling their shares.
Pros/ Cons Of Investing In GBTC Against Direct Investment In Assets:
Advantages of GBTC
The first and foremost reason to invest in GBTC could be that it’s challenging to figure out how to store Bitcoin securely. Besides, investors find it much easier to file taxes for tax regimes than investing in GBTC rather than going through tax regimes to their crypto holdings.
Moreover, there is always this concern of putting vast amounts of money in BTC among investors. The recent revelation that 95% of the BTC is fake has just added to investors’ anxiety.
The SEC supervises GBTC, which provides a sense of security to investors. Nonetheless, GBTC provides significant exposure to BTC’s price. GBTC makes it easy for risk-conscious investors to profit from price shifts.
Disadvantages of GBTC
One very evident disadvantage of investing in GBTC instead of directly investing in BTC is that shares in the trust come with a significantly high up-front cost.
The second reason could be that it takes some time for price fluctuations in BTC to be reflected in GBTC’s price.
The GBTC premium refers to the difference between the value of the assets held by the trust against the market price of those holdings.
GBTC products usually trade at a premium cost to the current value of the holdings or net asset value since it is a regulated path to Bitcoin exposure and is backed by institutions. The GBTC premium refers to the difference between the trust’ value of the assets and the market prices of those holdings.
GBTC premium allows investors to take advantage of this chance via arbitrage opportunities. Investors can either borrow Bitcoin or use it as an exchange for shares of GBTC. On completion of the six-month lock-up period, investors can sell the shares in the secondary market at the current premium.
To understand better, think of GBTC premium/discount as the pricing of closed-end mutual funds in the traditional financial markets. Since the Bitcoin amount is already made public by the trust, its value should mirror the value of the trust. However, the value is not the same.
The funds collected in this exchange buy and then return the borrowed Bitcoins to the lender. Meanwhile, the investors earn from the price difference thus generated because of the premium. As a result, they were successfully performing their arbitrage.
As of January 2022, the trust’s negative premium dropped to a new ATL or all-time low, as Bitcoin’s price oscillated around $35,000, as per the data from Coinglass. Since February last year, the GBTC has been on a steady downfall journey. The premium was recorded to 30% in January.
The very recent decline in premium discounts could be because of various reasons, such as the release of various spot exchange-traded funds (ETFs), rendering an alternative to Bitcoin investment to institutional investors through a regulated stock market value.
GBTC: Premium to NAV Chart
Below is the latest Discount or Premium to NAV chart:
Now, many of us might not know what a discount/premium to NAV is. Let us understand it briefly. It determines the amount that an ETF or closed-end fund is trading below or above its net value. It is an essential metric for tracking the maximum difference at which a security is trading away from its actual value. This metric is also quite significant for closed-end funds, mainly since CEFs don’t issue any additional shares after their initial offering. As a result, the price could deviate from the actual net asset value of the holdings in the CEF.
Formula: Discount/Premium to NAV = (Price / Net Asset Value) -1
There are various ways investors use GBTC premium:
- Some apply trading strategies with arbitrage on premium.
- While other traders use premium as an indicator for BTC price direction signals:
- Increase In Premium: Bullish or becoming overbought.
- Decrease In Premium: Bullish or becoming oversold.
Last year, Grayscale filed to turn its Bitcoin Trust into a spot Bitcoin ETF, which would be, backed by actual units of the digital assets and not just linked to it through derivative contracts.
Grayscale filled to convert its Bitcoin Trust into a Spot Bitcoin ETF, which they intended to be supported by actual units of the digital assets instead of only linking it to derivatives concerns.
However, no such signs of approval are shown from the United States Securities and Exchange Commission (SEC), quoting various regulatory concerns.
Meanwhile, investors who do not wish to sell their shares in the open market will have to continue to pay management fees to Grayscale since redemptions aren’t allowed.
In 2017, the premium of GBTC was around 100 % of the value of BTC. It means at an all-time high price of around $90,000. GBTC share buyers were actually paying 38 thousand for the equivalent of one BTC.
As of 18 February, the Bitcoin holding of Grayscale Bitcoin Trust is 643.24k. Around $25.7 billion are under management.