Kangaroo Markets

Efficient Frontier biweekly derivatives and markets newsletter. How accredit investors make up to 850% arbitraging GBTC and ETHE and why it might be a good idea for everyone to stack up on some Bitcoin or gold

Efficient Frontier
Jun 22, 2020 · 6 min read

Welcome to our 6th edition!

First, a quick overview

Are the Bitcoin markets experiencing the calm before the storm? Historical charts agree. The last 7 weeks had Bitcoin hovering between $8,200 to $10,400, at close to a 3 month relative low of volatility.

Source: skew.com

Implied volatility, reflecting the price traders are willing to pay to bet on high volatility using options, shows the relative calm in the Bitcoin market as well:

Meanwhile, put to call ratio open interest is the lowest skew has recorded, showing most of the money in Bitcoin options is trying to catch Bitcoin’s upside. This record optimism might be held be new market participants who keep joining the Bitcoin options space.

We might stop mentioning options are breaking records. But as we’re still treating it as news- new Open Interest records were set in Deribit and the CME, creating a new high for the entire market.

Two Shades of Grayscale

Owned by Digital Currency Group, Grayscale Investments operate GBTC and ETHE, the two only exchange-traded funds selling Bitcoin and Ethereum exposure in the US markets. These private open-ended funds hold $3.85 billion in assets to date, containing 365,000 Bitcoins and 2.4 million shares outstanding. They are the only instruments investors can currently use to gain exposure to Bitcoin and Ether in their IRA or 401K retirement accounts.

The unique thing about GBTC and ETHE is that they are accessed by two completely different channels:

  1. Only accredited investors are legally permitted to deposit assets directly into the Grayscale’s funds. To do so, investors transfer either dollars or cryptocurrency to Grayscale. Dollars are converted into cryptocurrency and all the funds are kept with Coinbase Custody. The investor is given equivalent shares which are priced at NAV (net asset value), meaning in this case, the current market price of the cryptocurrency, the underlying value of the fund. Importantly, investors have the right to sell these shares on the public markets after the end of a lock up period.
  2. Retail investors can only access GBTC and ETHE shares through the public markets where individual shares are traded, almost always premium because of the high demand and limited supply of these cryptocurrecny shares.
Source: Yahoo Markets. GBTC’s premium is currently close to 20% above BTC, and has reached 120% in 2017, while ETHE’s premium is close to 840% higher than the spot price of ETH at the time of writing.

GBTC opened for private placements in September 2013 and became available to retail investors on public markets in 2017, with one share worth 1/1000 of a Bitcoin. ETHE which opened in December 2017 started selling on exchanges in May 2019.

So how do funds profit off Grayscale’s GBTC and ETHC premium?


From here it’s easy: a hedge fund can borrow Bitcoin or Ethereum for a fixed fee, deposit the coins with Grayscale and wait until the regulated lock up period (6 or 12 months) is over. Then they sell it to the market with the added premium which can be very profitable at times — from an easy 20% to even 840% in the case of ETHE. This arbitrage is almost risk free, although the premium might drop to zero or negative if a US Bitcoin ETF is approved.

Source: 21 Shares

Grayscale is a way for accredited investors to own cryptocurrency under professional custody, but is it possible that a large portion of GBTC’s accredited investors are just in it for the arbitrage? Yes. Coinbase Custody requires a $1 million minimum balance to open an account, and charge 0.5% a year. Grayscale charges 2% ot 2.5% for the same custody with the added ability to sell the funds with a high premium. It stands to reason that accounts with Grayscale opened with more than $1 million are trying to capitalize on this premium.

So what’s the risk? besides an ETF pushing the preimum to 0,

Grayscale deposits in-kind (in cryptocurrency) VS in cash (dollars). Source: 21 Shares

This lucrative and low risk arbitrage opportunity is a result of the complicated regulatory landscape cryptocurrencies face in the United States and around https://www.youtube.com/watch?v=lBVH3Pv2tOc&feature=emb_logothe world. While a cryptocurrency ETF has not yet been approved by the US regulators, Grayscale’s roundabout method of serving a similar purpose, proves how much demand for it exists for such an instrument.

Kangaroo market update

It’s good time to revisit the traditional markets, which as some noted, seems to be reminiscent of cryptocurrencies in 2017. “Life is all about the impossible becoming reality” describes the rise of Bitcoin and cryptocurrencies from 0 to a $260 billion market, and unfortunately might pertain not just to perceived market insanity, but also to inflation and social instability.

Left: Real GDP growth per capita VS real median household income 1975–2009. Right: Household debt VS Savings 1953–2008. Source: Seeking Alpha
Total US debt VS economic activity. Source: FRED

It’s not hard to notice the world is in a strange place. The above charts help illustrate some ways in which society has been pushed to its limits, from stagnating wages to ballooning household debt, to society’s growth increasingly financed by debt.

According to ShadowStats website, if inflation was calculated using the same formula since 1980, inflation would be closer to 10% annually.

Unfortunately, according Adamant Capital founder and cryptocurrency researcher Tuur Deemester, the average citizen’s struggle could get worse before it gets better. In a recent conversation he noted that central banks printed more money in the last 6 months, than they printed in the last 10 years. “I’ve been worried about inflation, I really think it’s coming, and of course, a lot of people have cried wolf about inflation starting in 2008 and some of them even before that, but I just think we are seeing the writing on the wall now. I’m expecting inflation in all the major currencies the next 2–3 years to really ramp up significantly. And you know, maybe the stock market keeps going up, because who wants to be in bonds these days. I feel very good just focusing on liquid assets with low third party risk, which is bound to be Bitcoin and gold. “


  1. Speculate on the BitMEX funding rate: Delta Exchange launches the first cryptocurrency interest rate swap
  2. Lebanon suffers currency chaos, protestors break into central bank

3. OKEx launch Ethereum options

4. WIRESWARM and Deribit allow banks to trade cryptocurrency derivatives

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Efficient Frontier

With over 12 years of high frequency and algorithmic trading experience, our technology powers weekly over $1 Billion of trade. We’re passionate about digital assets and our mission is to bring professional, trusted technology that adds value to the industry and the markets.

Efficient Frontier

Written by

Leading research & algorithmic trading firm for the cryptocurrency markets efrontier.io

Efficient Frontier

With over 12 years of high frequency and algorithmic trading experience, our technology powers weekly over $1 Billion of trade. We’re passionate about digital assets and our mission is to bring professional, trusted technology that adds value to the industry and the markets.