Key Takeaways
GBTC Fund is up 25% since the start of the year, compared to a 4% rise in the underlying asset, Bitcoin
The discount is now back to where it was prior to the FTX collapse, at 37%
The discount had hit an all-time high of 50% only four weeks ago
The largest Bitcoin fund in the world, the Grayscale Bitcoin Trust, has seen its value jump by 25% since the start of the year. Bitcoin, on the other hand, is only up about 4% on the year.
This means that the discount to the underlying asset, Bitcoin, is at its smallest level in months. I had analysed the divergence in December, only four weeks ago, when the discount hit an all-time high of 50%.
Today, the discount sits at 37%, back to where it was before the ignominious collapse of FTX.
What is the Grayscale discount?
Grayscale is a trust which provides an avenue for investors to gain exposure to Bitcoin without physically buying Bitcoin. This can be convenient for institutions or other entities who may not be able to participate I the Bitcoin market directly for regulatory or legal reasons.
But Grayscale has rarely traded at the same price as its net asset value. Previously, it had traded at a premium to the underlying Bitcoin as shares surged with investors desperate to get exposure to the high-flying cryptocurrency.
Today, however, it is the opposite – a steep discount. While there is a chunky fee of 2% that explains some of the discount, this does not come close enough to bridging a discount of 30%+ that we have seen consistently in this crypto winter.
The SEC recently denied Grayscale’s application to convert the trust into an exchange-traded fund, spelling bearish action around the fund. There has also been the rise of more competition, with similar funds being launched, especially in Europe, and filings for Bitcoin ETFs.
But the most significant worry was surrounding the safety of reserves. This issue grew legs after the FTX collapse, as speculation mounted that Grayscale’s parent company, Digital Currency Group (DCG), may file for bankruptcy.
DCG is also the parent company to Genesis, which recently laid off 30% of its staff and is reportedly considering bankruptcy. Concern grew when Grayscale refused to publish a proof of reserves report, suddenly in vogue following the nefarious actions behind the scenes at FTX.
It cited “security concerns” as the reason that this would not be possible, but analysts decried this, with it very unclear what security concerns could be ignited by the publishing of public records on the blockchain.
6) Coinbase frequently performs on-chain validation. Due to security concerns, we do not make such on-chain wallet information and confirmation information publicly available through a cryptographic Proof-of-Reserve, or other advanced cryptographic accounting procedure.
— Grayscale (@Grayscale) November 18, 2022
Why has the discount closed?
While the discount is still enormous at 37%, this has narrowed from the staggering 50% it reached in the aftermath of the FTX implosion.
There has been increasing pressure on DCG to address this discount, with calls from within the industry that the trust should allow investors to redeem their holdings, which would allow them to realise the full value of the Bitcoin they hold. This clamour may have helped narrow the gap somewhat.
One hedge fund, Fir Tree, even launched a lawsuit against Grayscale, demanding that the company either lower its fees or allow redemptions such that the discount can be closed.
But like everything in crypto right now, macro also has a part to play. The year has begun with crypto prices rising off increased optimism that inflation may have peaked. This follows a relatively serene month or so in crypto markets.
The discount widened to a large degree in the aftermath of the FTX crash because people feared contagion and the chips were still falling. Similar to the peg on Tether slipping when the UST crisis occurred.
Now that normal service has somewhat resumed, the discount has narrowed. Unfortunately for investors, it is still a staggering 37% off the net asset value. In a year where Bitcoin itself has plummeted, layering in a discount on top of that torrid price action is the last thing investors needed…
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