What is GBTC: Grayscale Bitcoin Trust or GBTC Premium Explained
In this series of BitKan Learn, we will learn a bit more about what GBTC, or Greyscale Bitcoin Trust is. As you may have known about Bitcoin, one crucial thing that makes people hesitate to own one is how complicated it is to learn how to get access to it — you have to find an on-ramp solution (i.e. finding a place to put your cash and converting it into digital currency), then find an exchange that could convert that digital currency to Bitcoin (BTC), then finally moving that BTC out to a decentralised BTC wallet where you own the keys to (and effectively, you own that BTC as well).
Hence, the Grayscale Bitcoin Trust (GBTC) was created by Grayscale, which is a digital currency investing and cryptocurrency asset management platform. GBTC is a digital currency investment product that institutions and individuals alike were able to gain exposure to Bitcoin without the perils of self-custody when holding BTC. GBTC can be bought and sold by individual investors in their own brokerage accounts.
GBTC is like gaining exposure to BTC without having to go through the process of self-custody. It is a simple way to make a Bitcoin investment through the stock market.
GBTC shares could be acquired either through an OTC market, or “minting” by depositing Bitcoin into the trust and receiving an equivalent number of shares that could be sold in 6 months.
How GBTC works
First, Grayscale invites a pool of wealthy investors to give cash to the fund, and it uses this money to buy Bitcoin. Next, Grayscale places the fund on public stock exchanges, allowing anyone to buy and sell shares.
As the price of Bitcoin increases (or falls), the value of the fund tracks this price. This means that the fund itself, as well as shares in it, follows the price of BTC. This process means that accredited investors — or those invited to contribute to the fund during its initial, private round — make a direct return on reselling their shares.
GBTC vs Bitcoin: Understanding GBTC Premium and other Grayscale products like ETHE, ETCG, LTCN, BCHG, etc.
You might hear that GBTC or other Grayscale products have a “premium.” Again, because GBTC works by getting rich people to invest in actual BTC, the BTC that Grayscale holds in this GBTC fund appreciates or depreciates in value according to the market. This value is known as the native asset value (NAV), or the underlying value of BTC per share.
On the other hand, the current market price of the holdings is what the trust (GBTC) costs on the stock market.
Hence, GBTC premium is a reference to the difference between the value of the holdings of the trust vs. the market price of the holdings.
When the market price is higher than the NAV, the difference is called a “premium.” Thus, NAV + premium = market price.
No one dictates this premium. Supply and demand on the stock market creates the premium! In other words, traders create this premium as a result of trading (there is no entity or formula that comes up with the premium).
As a rule of thumb, if you don’t understand the premium, you shouldn’t be buying shares of GBTC or another trust. This is especially true with new trusts as they can tend to trade at a very large premium when they launch and sometimes even higher sometime later (LTCN, the LTC fund from Grayscale used to hit 20x its market price!). It can be months to years into a trust being launched before they even out to a reasonable premium, so you’ll really want to keep an eye on this.
GBTC vs Bitcoin: What GBTC Discount means
Due to the bear market conditions, in 2021 some Grayscale products started trading at a discount! That means they are trading under their NAV.
Currently, in November 2022, GBTC is trading at a 45% discount to it’s NAV (Net Asset Value). This means that at Bitcoin’s current price of ~$16,500, you only need to have $9,075 of GBTC to have exposure to a whole Bitcoin.
This has the following implications.
Investors weren’t willing to pay a premium for GBTC anymore. In fact, they were demanding a discount to buy the trust, which had no mechanism to keep its market price close to its net asset value. Thanks to thin liquidity and mass capitulation, many investors have had to sell their GBTC on the open market. As the underlying BTC is held in a trust, and not an ETF, GBTC cannot simply be redeemed for Bitcoin and held or sold.
Therefore, anyone who wants to exit their GBTC position would be required to unload it on the already demand-weak OTC market, which would widen the gap further.
Amid continued turmoil in decentralized finance (DeFi) spilling over to infect the crypto market, conditions have deteriorated for investors big and small.
Grayscale Refuses to show Proof of Reserves
Another thing to note is how Greyscale refuses to prove that their underlying assets for the GBTC fund (which should technically have BTC in it) are intact, as they have been impacted by the FTX contagion. This is worrying especially as Grayscale’s sister company Genesis paused withdrawals and new loan originations, signalling that there are major signs of stress on GBTC reserves.
Should I buy GBTC in 2023?
Here are two rules to consider when buying GBTC:
- The premium makes GBTC or another trust bought at a high premium a risky bet (even riskier than BTC or the other crypto themselves). This is because if crypto goes down hard, which it often does, the premium can shrink and magnify your losses!
- The premium makes GBTC or another trust bought at a low premium a potentially profitable bet (even better than BTC or the other coin themselves). This is because if crypto goes up hard, which it sometimes does, the premium can expand and magnify your gains!
Hence, if the premium is decreasing, it can be seen that there is bearish sentiment and vice versa!
Grayscale’s Bitcoin trust is probably one of the riskiest ways to buy Bitcoin. It’s a derivative that charges a large management fee while offering no redemption and you can’t trade it outside of normal market hours. Additionally, private placement is currently closed, so as Grayscale continues to take its management fee out of the fund via BTC holding decay, Grayscale is seemingly a net seller of Bitcoin at this point in time.
Furthermore, Grayscale is now entering a legal fight with the SEC. That is a fight that has the potential to be both expensive and damaging to Grayscale in the eyes of US regulators.
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