Grayscale’s Bitcoin Trust made headlines again with their record 1-day addition of 16,244 Bitcoin, adding to their stack of over 630,000 Bitcoin and an AUM of ~$23B. Evidently business is good…So who are their investors? And is GBTC’s premium an incentive or disincentive?
What is the Grayscale Bitcoin Trust (GBTC)?
Grayscale owns BTC in the trust & investors buy shares to represent a # of BTC. There’s a 2% per year fee + a “premium.” The premium is the diff. between underlying BTC value(Native Asset Value or “NAV”)vs. the market price of holdings(what shares cost).
There are 2 layers of investors. There are the base layer investors – accredited investors selected to buy into the private placement of the fund at the “NAV” price aka the price of the underlying BTC value. They can send USD or Bitcoin and receive a # of shares equivalent to the BTC value (0.00094919 BTC/share).
One catch is it’s 1 way – Once you put BTC into the trust, it can’t be redeemed. Investors can sell their shares, but the BTC will remain in the trust and off the market.
Base layer investors have a 6 mth lockup before they can sell shares in the open market to the 2nd layer of investors. These 2nd investors must pay a higher, market price for the shares. Again, the “premium” is the diff. between the price of open market shares vs. underlying BTC priced shares.
The largest investor is Three Arrows Capital, which recently increased a $259M position to $1.4B (~6% holding in the trust). They are one of the investors taking advantage of the trade by getting in as a private placement at the base layer of the fund. By investing at NAV, at the base layer, their shares are locked for 6 months but they then sell the shares at the higher market price, locking in the premium. The premium historically stays ~20%, but can increase in a bull market where demand for shares is high (in Dec., it was +40% .
Another investor doing this? Blockfi (~5% shares in the trust). Blockfi will give you 6% return when you lend them BTC, because they can then lend your BTC to those like GBTC. In this case, they lend Grayscale the BTC and get in on the fund where they take advantage of the premium. For those 2nd layer investors who buy shares in open market, the premium is a magnifying risk. If BTC dips hard then losses deepen because you have the NAV (price of BTC) drop AND a drop in the premium you bought. Likewise, if you buy before a bull market/premium pump, your gains are greater.
Why the premium?
It’s the market gap between supply/demand. Demand for shares > supply because new shares are continuously created but delayed by the 6 month lockup. Conversely, ETFs keep premiums in check because new shares can be created but have no lockup/trade now, arbitraging premiums away.
Why do smaller, 2nd investors accept GBTC premium risk vs. a pure BTC buy?
1)You can buy it easily with your traditional brokerage account.
2)You avoid self custody.
3)Tax advantages, its IRA eligible.
4)If you think there’s a bull run soon you take advantage of the premium pump
Accredited investors obviously have a strong incentive with the premium to enter the private placement, but it’s more than that. For some institutional investors, GBTC is one of the few ways they can gain BTC exposure. Many investment funds have governing charters restricting direct crypto investment and/or they don’t want to custody BTC. But everyone is able to invest in publicly traded assets, like GBTC, so they get the best of both worlds. Internal regulations allow it & they avoid custody.
This won’t last forever. As the market matures & there are more options to trade BTC on a public market(BTCETF), there will be fewer 2nd investors willing to pay the premium and it will drop to meet lower demand. Then, GBTC will lower the 2% management fee & try to convert to an ETF.
TL;DR: The GBTC premium occurs on the 2nd market and provides a very attractive trade for those accredited investors able to join the private placement and invest at Bitcoin’s NAV at the fund’s base level. However, this premium will begin to disappear as the market matures.