What happened to the GBTC premium?

Late last month, the Grayscale Bitcoin Trust (GBTC) started trading at a discount — for the first time in its nearly six-year history as a publicly-traded investment product. Thirty days later, it's still trading at a discount.

Shares in GBTC are issued when large investors buy them at a net asset value (NAV) via private placements, either via cash or bitcoin. Then the shares face a six-month lock-up period: they can't be sold at secondary over-the-counter (OTC) markets until the lock-up period expires.

For years, GBTC traded at a premium, meaning that the market price of GBTC shares was higher than its NAV — by an average of 35%. Now GBTC is trading at a discount (around -4% at the time of publication). Earlier this month it hit -12%, its lowest point ever.

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What happened to the GBTC premium? And will it ever return?

No more monopoly

One of the most important factors affecting the value of GBTC is the recent entry of new competitors into the market. For a long time, GBTC has been the go-to product for institutional investors wanting exposure to bitcoin. But it no longer has monopoly status.

A slew of new bitcoin investment products have launched in recent weeks, including Canadian bitcoin exchange-traded funds (ETFs). And these products have rapidly garnered many millions of dollars in assets.

Purpose bitcoin ETF — which became the world’s first bitcoin ETF when it gained approval from Canadian regulators on February 11 — has already amassed more than $800 million in assets. Rivals Evolve Bitcoin ETF and CI Galaxy Bitcoin ETF have collected more than $84 million and $38 million, respectively.

"This money would have gone naturally to GBTC," said Nikolaos Panigirtzoglou, managing director of JPMorgan's global market strategy team. Panigirtzoglou called the approval of Canadian bitcoin ETFs, especially the Purpose's product a "game-changer." 

ETFs may be more attractive to institutional investors because they are significantly cheaper, continuously offer shares, and can be redeemed for the underlying investment. GBTC and similar bitcoin trusts, on the other hand, come with a lock-up period and don’t have an ETF-like redemption mechanism in place.

For the time being, GBTC remains an attractive investment product given its superior liquidity, Ben McMillan, portfolio manager of the RG Aurum+ Fund (GLDPX) — one of the largest shareholders of GBTC shares, told The Block. “More products coming to market ultimately is good for us, but we're not in any rush to stop using Grayscale any time soon."

Selling pressure

Besides the new competition, another big factor having an impact on GBTC's premium is institutional investors selling their shares for arbitrage gains, said David Fauchier, fund manager at crypto asset management firm Nickel Digital.

GBTC has historically traded at a premium because it offers a relatively easy way to invest in bitcoin. One can invest in the product via brokerage and retirement accounts and get exposure to bitcoin without worrying about custody requirements.

To gain the GBTC premium, many institutional investors have been making arbitrage trades. This trade became "super popular" around last July, according to Fauchier.

Indeed, GBTC's inflows increased consistently from around July last year until January of this year, according to data compiled by The Block.

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"I was getting calls most days suddenly in July from people who were putting money in this, and they were saying ‘it's free money,’" said Fauchier. "Lots of people piled into it."

Ari Pine, founder of crypto prime brokerage Digital Gamma, said the rapid rise in popularity of the GBTC arbitrage trade coincided with the explosion in popularity of the crypto lending market in the summer of 2020.

Eventually, all those traders who got in this summer chasing the premium started selling. That pushed the price of GBTC  down.

That's what happens on Wall Street too, said Pine, who has previously worked in traditional finance. "Beat the trade to death until you've got every last cent out of it. And then some. And the last people in are usually in a bad situation."

So why are investors still selling their shares now that the premium isn’t available? They see a risk that GBTC's premium will "never return to significant positive territory," said JPMorgan's Panigirtzoglou.

The new competition may also be contributing to the selling pressure. Investors are thinking, "What if Canadian bitcoin ETFs, such as the Purpose Bitcoin ETF, become the 'new GBTC?’” said Panigirtzoglou.

If any of the competing products were to become as big and as liquid as GBTC, “then that's it for GBTC," he said. "Its role will diminish over time."

Either way, Panigirtzoglou predicts that the days of very high GBTC premiums are behind us. "I doubt GBTC will ever trade at a 20% or 30% premium again."

Nickel Digital's Fauchier, RG Alts' McMillan, Digital Gamma's Pine, and The ETF Store's Nate Geraci, all agreed with that.

No new money

Not only is there selling pressure on GBTC, but there also isn’t any new money coming in.

GBTC's inflows have remained flat for over a month. Last week, Grayscale halted new investments in GBTC.

Then, Digital Capital Group, the parent company of Grayscale, announced that it would buy up to $250 million in GBTC shares. (According to data compiled by The Block, DCG already held nearly 12 million shares of GBTC, worth about $633 million, as of February 22.)

When reached for comment for this article, a Grayscale representative told The Block, "we don't comment on the price of GBTC."

Meanwhile, crypto lenders like BlockFi and Genesis could be losing out on business because historically many traders have used these services to buy or borrow bitcoin so they can purchase GBTC shares at issuance.

Genesis declined to comment for this article. 

As for BlockFi, it is also the second-largest shareholder of GBTC. It owns about 36 million shares, worth nearly $2 billion, according to data compiled by The Block. 

BlockFi CEO Zac Prince declined to provide comment for this article, and instead referred to a recent podcast appearance. During the podcast, Prince said that a GBTC discount can also be "just as interesting of an opportunity as a premium and creates another arbitrage scenario."

He added that since it's not good for Grayscale's interests to have its products trading at a discount, it will likely start doing things to close that gap.

That may be why DCG announced its plan to buy GBTC shares. Grayscale has also recently launched five new trust products to diversify its revenue.

DCG could continue to buy GBTC shares, said Prince. It’s also possible that Grayscale might either convert GBTC into a bitcoin ETF or create a redemption mechanism for GBTC.

The firm did list several new ETF-related jobs last week.