Bitcoin (BTC) price is struggling to break the $ 40,000 mark after briefly exceeding it on May 26th. The cryptocurrency is currently trading at around $ 36,000, a 44% decline from its all-time high of $ 64,889 on April 14. Amongst other things, A key difference between the macroeconomic conditions affecting the cryptocurrency market as a whole is institutional demand.
One of the main investment vehicles for this type of demand is the Grayscale Bitcoin Trust (GBTC), a BTC trust from Grayscale Investments, one of the most important investment managers for institutions that are dedicated to digital currencies. The trust enables investors to be exposed to the price of Bitcoin via a traditional regulated investment vehicle without having to buy, store and hold their tokens directly.
The GBTC is publicly traded on the OTCQX, an over-the-counter market that enables stocks to be traded.. Conditions is currently trading in the USD 30 range, up 46% from its all-time high of $ 58.22 on February 19th.
Each share represents 0.00094716 BTC and the share follows the market price of Bitcoinwithout incurring commissions and expenses. It has a minimum term of six months and a $ 50,000 minimum investment requirement, which is not ideal for retail investors.
The grayscale BTC premium has been negative for over three months
Due to the impact of institutional demand that Grayscale supports and the fact that it is a regulated way to gain exposure to Bitcoin, its products are typically sold at a premium to the net asset value (NAV), or present value of the stocks acted. The GBTC premium refers to the difference between the value of the assets held by the trust and the market price of those shares.
Before February 23 of this year, this difference was always a positive number, and the premium hit its all-time high of 122.27% four years ago on June 6, 2017. Since the end of February this year, the premium has been converted into a discount and on May 16 it reached an all-time low of -17.89%.TO
Since this difference is driven by supply and demand factors in the marketplace, an increasing GBTC premium indicates higher Bitcoin entry into the trust while a falling premium that becomes a discount indicates a decline in the entry of BTC, which means that the GBTC is trading at a discount to the spot price of Bitcoin.
Cointelegraph discussed the impact of the GBTC premium trend reversal with Nikita Ovchinnik, director of business development at 1inch Network, a decentralized cryptocurrency exchange. Ovchinnik said: “It seems that the GBTC premium is a very good indicator of medium-term market sentiment. The cousin Turned negative in late April, and while digital assets were booming locally, lack of institutional interest predicted a fall in market cap in May“.
This trend is in line with the number of Bitcoin the Grayscale Trust has in its holdings.as it has gradually risen since January 13th to hit its all-time high of 655,702.89 tokens on March 2nd. Since then, its Bitcoin reserves have been gradually falling for the first time, reaching the current level of 652,410.55 on June 4th. The trust currently has an AUM of $ 24.27 billion.
The premium enables investors to take advantage of this opportunity through arbitrage opportunities. One option for investors is to borrow Bitcoin and use it as an exchange for GBTC shares. After the six-month blocking period has expired, investors can sell the shares on the secondary market at the applicable premium.
With the funds they receive in this exchange, they buy and return the BTC tokens loaned to the lender. In this process, Investors collect the price difference created by the premium and thus carry out their arbitrage successfully. Ovchinnik continued:
“The GBTC is one of the most convenient and secure entry points for institutional funds. It seems that its demand was one of the drivers in early 2021, but it slowed and we no longer hear new companies claim that they have chosen to diversify and that they are trying to have blockchain assets. “
In traditional financial markets, the GBTC premium / discount can be compared to the price of closed-end mutual funds. In the best case, the value of the fund should be exactly the same as the amount of Bitcoin is publicly disclosed by the mutual fund. Due to the mentioned surcharge / discount factors, the value is not the same.
Bryan Routledge, associate professor of finance at Carnegie Mellon University’s Tepper School of Business, told Cointelegraph that the “premium reflected their position as a” regulated “alternative to owning Bitcoin” where “an investor would pay a premium to gain access through a trust”. Routledge also added that the GBTC premium should not be perceived as an additional cost:
“If you buy and sell and the premium is the same, the impact is minimal. Lately, there have been easier and more convenient ways to access Bitcoin, so the GBTC premium has gone down “.
Although the GBTC is trading at a discount to the NAV, there have been some positive signs in the recent trend. The GBTC rebate rallied sharply between May 21st and May 24th, from -21.23% to -3.86% before declining to around -12% on June 3. This suggests that institutional interest is increasing as Bitcoin prices drop between these days..
The direction in which the GBTC premium / discount is moving could serve as an indicator of market sentiment towards the asset, especially among institutional investors..
Bitcoin ETFs are a close competitor to the GBTC
In addition to the terms and conditions Exchange-traded Bitcoin funds are another way for institutional and private investors to expose themselves to Bitcoin price volatility via a regulated channel..
Purpose Investments launched the first Bitcoin ETF in North America on February 18th, where assets under management (AUM) rose to over $ 500 million in less than a week and topped $ 1 billion in the same month. The ETF’s assets under management are currently $ 714.6 million, or 19,407.63 Bitcoin, as of June 4, using the BTCC ticker.
In addition to Purpose’s BTC ETF, Evolve ETFs launched their own Bitcoin ETF with the EBIT ticker on February 19.. Although it lost the benefit of being the first to get the Purpose ETF, it currently manages $ 78.52 million in assets, which is just over 12% of BTCC’s current AUM. In general, there are several notable ETFs listed on the Toronto Stock Exchange.
The interesting thing about these ETFs is that the timing of their launch coincides with a decline in the GBTC premium, which eventually turned into a discount. Routledge mentioned why this might be the case: “ETFs are a cheaper way (transaction costs, fees) to invest in Bitcoin. Hence, Grayscale’s premium has gone down, reflecting the good, old-fashioned competition.“.
The GBTC Trust has a management fee of 2%, while the Purpose BTC ETF has a management fee of 1% and the Evolve ETF is even lower at 0.75%. Due to the success of existing Canadian ETFs, the appeal of the ETF market is so great that even Grayscale has confirmed it will convert your products into ETFs.
But first they’d need the elusive SEC approval, which several companies like Fidelity and SkyBridge have already applied for. For Ovchinnik, the existence of this new Products is “very important in the long term, although we do not see changes immediately”.
Competition for Bitcoin ETF market share will intensify if the US SEC approves one of the numerous ETF applications for cryptocurrencies it has received. Until then, the GBTC will remain one of the main indicators of institutional interest as ETFs are hot on the heels, battling for the same market participants.
Likewise, With GBTC closed to new investments until September this year, no drastic changes to the current GBTC discount are expected, but a number of positive trends, as seen between May 21st and 24th, could bring good news for the lack of institutional demand in the market.