main conclusions
The GBTC Fund is up 25% since the start of the year, compared to a 4% rise in the underlying asset, Bitcoin The discount is now back where it was before the FTX collapse, at 37% The discount has hit an all-time high of 50% just four weeks ago The world’s largest Bitcoin fund, the Grayscale Bitcoin Trust, has seen its value soar by 25% since the start of the year. Bitcoin, on the other hand, is only up about 4% on the year. This means that the discount to the underlying asset, Bitcoin, is at its lowest level in months. I had analyzed the divergence in December, just four weeks ago, when the discount hit an all-time high of 50%. Today, the discount is at 37%, back to where it was before the FTX’s disgraceful collapse.
What is the Grayscale discount?
Grayscale is a trust that provides an avenue for investors to gain exposure to Bitcoin without physically purchasing Bitcoin. This can be convenient for institutions or other entities that cannot directly participate in the Bitcoin market for regulatory or legal reasons. But Grayscale has rarely traded at the same price as its net asset value. Previously, it traded at a premium to the underlying Bitcoin as shares soared with investors desperate to gain exposure to the bullish cryptocurrency. Today, however, it’s the opposite – there’s a big discount. While there is a hefty 2% fee that explains some of the discount, that doesn’t come close enough to top a 30% or higher discount we’ve seen consistently this crypto winter. The SEC recently denied Grayscale’s request to convert the fund into an exchange-traded fund, signifying bearish action around the fund. There has also been the rise of more competition, with similar funds being launched, especially in Europe, and orders for Bitcoin ETFs. But the most significant concern was around the security of the reserves. This problem escalated after the FTX collapse, as speculation mounted that Grayscale’s parent company, Digital Currency Group (DCG), could file for bankruptcy. DCG is also the parent company of Genesis, which recently laid off 30% of its staff and is considering bankruptcy. Concerns were raised when Grayscale refused to publish a proof of reservations report, suddenly in vogue after FTX’s nefarious behind-the-scenes actions. He cited “security concerns” as the reason this would not be possible, but analysts condemned him, making it very clear what security concerns could be triggered by publishing public records on the blockchain.
6) Coinbase frequently performs on-chain validation. Due to security concerns, we do not make such on-chain wallet information and confirmation information publicly available through a cryptographic Proof-of-Reserve, or other advanced cryptographic accounting procedure. — Grayscale (@Grayscale) November 18, 2022
Why is the discount over?
While the discount is still huge at 37%, it has dwindled from the impressive 50% achieved after the FTX implosion. There has been mounting pressure on the DCG to handle this discount, with calls from within the industry that the fund should allow investors to redeem their holdings, which would allow them to cash in the full value of the Bitcoin they hold. This outcry may have helped narrow the gap a little. One hedge fund, Fir Tree, even filed a lawsuit against Grayscale, demanding that the company lower its fees or allow redemptions so that the discount could be ended. But like everything else in crypto now, the macro also has a role to play. The year started with cryptocurrency prices rising on rising optimism that inflation may have peaked. This follows a relatively serene month or so in crypto markets. The discount largely increased after the FTX crash as people feared contagion and chips were still falling. Similar to the peg on Tether slipping when the UST crisis occurred. Now that normal service has resumed, the discount has decreased. Unfortunately for investors, that’s still a staggering 37% discount to net worth. In a year where Bitcoin itself has plummeted, putting a discount on top of this torrid price action is the last thing investors need…
