The GBTC discount is a unique challenge for grayscale and investors

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Since 2013, the Grayscale Bitcoin Trust Fund (GBTC) has offered its investors exposure to Bitcoin (BTC) through a listed private instrument. However, the convertibility and liquidity of the trust differ significantly from those of an Exchange Traded Fund (ETF).

Trusts are structured as companies, at least in regulatory terms, and are “closed funds” that can initially only be sold to accredited investors. This means that the number of stocks available is limited and retailers can only access them through secondary markets. Additionally, a GBTC share cannot be redeemed for the underlying BTC position.

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In the past, GBTC traded above the BTC equivalent held by the fund due to excessive retail demand. It was common practice for institutional clients to buy shares directly from Grayscale at face value and sell them for a profit after the six-month lock-up period had expired.

For most of 2020, GBTC shares traded at a premium to their net asset value (NAV) that ranged from 5% to 40%. However, this situation changed drastically in March 2021. The approval of two Bitcoin ETFs in Canada was a major contributor to the expiry of the GBTC premium.

ETF funds are less risky and cheaper than trusts. In addition, there is no lock-up period and retail investors can have direct access to purchase shares at par. The advent of a better bitcoin investment vehicle therefore seized upon a great appeal that GBTC once possessed.

Can DCG store GBTC?

Grayscale GBTC Premium versus Net Asset Value. Source: Ycharts

In late February, the GBTC premium broke into bad territory and owners began desperately to flip their positions so as not to get stuck in an expensive and unredeemable instrument. The situation worsened to an 18% discount, even though BTC price hit an all-time high in mid-March.

On March 10, Digital Currency Group (DCG), the parent company of Grayscale Investments, announced a plan to purchase up to $ 250 million of the outstanding GBTC shares. Although the conglomerate did not specify the reason for the move, the excessive discount would certainly have put their reputation under pressure.

As the situation worsened, DCG announced a roadmap for converting its trust funds into a U.S. ETF, although no specific guarantees or deadlines were disclosed.

On May 3, the company announced that it had purchased GBTC shares worth $ 193.5 million by April. In addition, DCG increased the repurchase potential of GBTC shares to $ 750 million.

With $ 36.3 billion in assets under management for the GBTC Trust, there is reason to believe that purchasing $ 500 million worth of shares may not be enough to reduce the discount.

Because of this, some important questions arise. For example, can DCG lose money through such a trade? Who is desperate to sell and is analyzing a conversion to an ETF?

I’m looking forward to

As the controller of the fund administrator, DCG can buy the shares in the trust fund at market prices and withdraw the corresponding Bitcoin for redemption. Hence, buying GBTC at a discount and selling the BTC at market prices will consistently result in a profit and there is no risk involved.

Other than a few funds that regularly report their holdings, it is not possible to determine who sold GBTC below net asset value. The only investors with 5% or more stakes are BlockFi and Three Arrows Capital, but none have reported reducing their position.

As a result, multiple retailers could potentially abandon the product at any cost, but it is currently impossible to know.

While buying GBTC at a discount of 10% or more may seem like a bargain at first, investors need to keep in mind that as of now there is no way to get out of these stocks other than sell them in the market.

The views and opinions expressed here are solely those of author and do not necessarily reflect the views of Cointelegraph. Every investment and trading step is associated with risks. You should do your own research when making a decision.