[Company Watch] An Analysis of Grayscale’s Premiums (2/2)

This series has two articles and is supportive of our strategy of arbitraging GBTC/BTC. For the first article, please follow us and look for [Company Watch] An Analysis of Grayscale’s Premiums (1/2).

In the earlier article of this series, we have analyzed some basic information about the premiums for Grayscale’s exchange-traded OTCQX products, GBTC and ETHE, and having read numerous articles on the Internet, there is essentially no rational explanation for the premiums for these products. A popular view is that this premium is the result of a combination of factors. This article goes further to analyze the validity of the different factors. But let’s preface the conclusion: there is no conclusion.

Let’s start with a list of facts:

1)There is a strong correlation between the GBTC premium and the BTC price

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

https://grayscale.co/bitcoin-investment-trust/#market-performance

For example, it’s clear that in 2017 there was a strong correlation. In the last 2 years, premium was lowest at the end of 2018 when the BTC price was lowest; and high in mid-2019 and early 2020 when BTC price was high.

2)Reasonable Turnover Rate

For a 9.7 billion mark with an average daily volume of 95M trades, 1% is not high. Apple has almost 1%, and Tesla and other hot companies of the moment are even higher. Trading volume reflects the heat. Historically GBTC’s trading volume peaked in a crazy December 2017, when GBTC held about 1/3 as much BTC as it does now.

3)The majority of GBTC holders are institutions

https://secfilings.nasdaq.com/filingFrameset.asp?FilingID=14441024&RcvdDate=10/14/2020&CoName=GRAYSCALE%20BITCOIN%20TRUST%20(BTC)&FormType=8-K&View=html

This is Grayscale’s Nasdaq disclosure. 80% of investors are institutional. We found some other information from another website, which is a summary of SEC disclosures (excluding Blockfi and Three Arrows, which have more than 5% of shareholders). Unfortunately, U.S. asset managers with less than $100 million in assets are not required to disclose their positions, and GBTC is not on the SEC’s list of required positions, so this is more of a voluntary disclosure. These institutional shareholders add up to less than 3%, and Blockfi and Three Arrows together account for less than 80%. So GBTC’s shareholder list is currently a black box. It’s hard to imagine GBTC as a stock that can be bought with a regular brokerage account on the OTCQX, but its holders are 100% institutional. It’s quite possible that Grayscale’s chart above means that the source of funds for GBTC subscriptions is as above, rather than the composition of the holders of funds as above. In any case, this is a black box.

4)There are some pension fund positions that come from self-managed investment

From the above GrayScale’s SEC disclosure filing, 2%-3% of the position comes from pension funds. Charles Schwab, the largest U.S. brokerage firm, reported in its Q3 2019 report that of the 145,000 users at his firm who actively manage their invested pension accounts, 1.84% of those between the ages of 22 and 38 have allocated 1.84% of their equity assets to GBTC (equities). (Assets account for about 1/3 of their pensions, a little over $100,000 each, all estimates). This data has been reported by Forbes and Businesswire, as well as a number of crypto media, but is no longer part of Charles Schwab’s report (nor is it confirmed that it ever existed). This number does not extrapolate to the percentage or amount of individual holdings of GBTC, but if the source of this data is accurate, it would at least suggest that GBTC is close to the popularity of tech stocks like Netflix and Tesla among the 30-something and 40-something demographic. Given that the size of each person’s pension is relatively constant, this ratio largely justifies GBTC’s perception among retail investors. Again, however, the premise is that this data is real.

https://www.businesswire.com/news/home/20191204005172/en/Schwab-Report-Self-Directed-401-Balances-Hold-Steady

5)More than half of GBTC is directly funded with BTC and can be leveraged

Grayscale accepts funding in the form of BTC, and in a 2019 report, it disclosed to the SEC that more than 70% of private placements in the second and third quarters of 2019 were clients exchanging their BTC holdings for GBTC shares. However, Grayscale has since stopped disclosing this data. Customers who already hold BTC are putting BTC into GBTC for the sole purpose of converting it into fiat currency, or to arbitrage a premium.

In addition, Blockfi or Genesis is said to offer lending based on Grayscale GBTC trust units as collateral.

Summarizing the above analysis, we conclude:

  • Secondly, GBTC’s trading volume averages 1% per day, $100 million per day in October, and $2 billion per month, with about 150,000 to 180,000 bitcoins traded at the average price in October. 6 months ago, GBTC’s incremental volume was 10,000 to 20,000 per month. So the volume of transactions is far greater than the demand for arbitrage. Therefore, there are indeed groups of people trading GBTC. Given that GBTC’s turnover is also close to that of popular tech stocks, we can’t rule out the possibility that it’s the general tech investing community (individuals and professional institutions alike).
  • Third, because the GBTC premium is correlated with the BTC price, it suggests that its holders are treating GBTC as a speculative target, rather than really tracking it.

So at this stage, one of our guess is that the GBTC premium has led to a massive arbitrage opportunity that has caused the GTBC NAV to skyrocket in size. And the size of the ticker has further invited more hedge funds and individual investors to enter the market. Whether or not they recognize the long term value of BTC, but they have at least begun to make money from the volatility.

From the SEC 13F disclosure of GBTC’s investment institutions, there is no evidence that mutual funds, or the old money, recognized the value of BTC and began to enter the market on a large scale. But hedge funds can profit from GBTC’s volatility, whether they recognize its value or not. Hedge funds also have all the more reason to be concerned about issues that long term investors are not (therefore choosing GBTC and BTC as the trading underlying)

  • If it is high-frequency trading with a large amount of data, is there a tax filing service? Most likely, the virtual currency exchanges do not have such a service, but mature brokerage firms have tax filing aids that match IRAS.
  • The ability to leverage, which is very common in U.S. brokerage firms, but there are not many blockchain exchanges in the U.S. Providing leveraged trading.

In general, if hedge funds have the need for high-frequency trading rather than buy-and-hold, they will probably not consider Coinbase, which is more like a wallet with high transaction fees. Hedge funds will choose their own familiar brokerage firms rather than virtual currency exchanges whose prices and services are inferior to those of traditional brokerage platforms. For hedge funds, it does not matter whether GBTC has a premium for BTC or not, what matters is whether BTC price and the BTC premium are volatile or not. Therefore, hedge funds may be willing to accept a larger premium.

The hedge fund we are talking about here is not just registered funds in a SEC sense, but in a broader sense, an institution or individual willing to actively trade. In addition, we do not rule out the possibility that hedge funds bought GBTC and shorted BTC at the same time to realize profits from the premium alone; from the historical data, the fluctuation of the premium is a derivative of BTC, which is more traceable.

Overall, GBTC effectively dovetails BTC into the traditional financial markets and is long term positive for BTC.

(Serenity Team, 9 Dec 2020)

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The Serenity Fund

Zero market risk and stable return - risk neutralised cryptocurrency fund.