key takeaways
- Grayscale is the world’s largest bitcoin fund
- Discounts for the underlying asset (Bitcoin) reach record highs, breaching 50%
- Concerns about reserves, high fees and other hurdles explain the discount, which likely won’t take off anytime soon.
The discount to the Net Asset Value of Grayscale Bitcoin Trust is at an all-time high. The discount went past 50% for a while, then retreated slightly to where it currently sits at 48.8%.
This comes on the back of the SEC confirming its reasons for rejecting Grayscale’s application to convert the trust into an exchange-traded fund.
Grayscale Bitcoin Trust is the largest Bitcoin funds in the world, but it rarely trades at the same level at which its underlying asset, bitcoin. The above chart shows that it has traded at a premium since its inception compared to bitcoin until this year.
The fund allows accredited investors to gain exposure to bitcoin without having to worry about storing or managing their holdings. It previously traded at a premium as demand for the shares increased with institutions seeking bitcoin exposure. However, this convenience comes at a fee – and a hefty one at 2%.
Grayscale demand to drop in 2022
Since March, Grayscale shares have been trading at a discount to bitcoin. The fund has $10.7 billion in assets under management, a 65% decline over the past year, reflecting the bloodshed in crypto markets.
But bitcoin’s discount means shareholders are being hit doubly hard.
“The fact that Grayscale’s Bitcoin Trust is now trading at a nearly 50% discount is terrifying for GBTC holders. “It really highlights the huge differences in the quality of structures between different investment vehicles,” Bradley Duke, co-CEO of ETC Group, told CoinDesk last week.
The decline in flows stems from greater competition as several competing funds have been launched, particularly in Europe, as well as several filings for bitcoin ETFs in the US. The discount is also because investors have no way to redeem their holdings for bitcoin in the trust, but are being charged a 2% fee at all times.
However, these factors are usually slackened by arbitrage traders taking advantage of price divergence. But this year’s events have undermined even that.
Concerns about Grayscale’s repository
Over the past month, concerns have grown in the market that Grayscale’s parent company, Digital Currency Group (DCG), may file for bankruptcy. This is due to issues surrounding crypto broker Genesis, whose parent company is also DCG.
Genesis has denied that they will file for bankruptcy imminently, but the firm was mired in ftx collapse and is currently undergoing restructuring. Genesis closed withdrawals on November 15thth,
This concern is exacerbated by questions surrounding Grayscale’s repository. Namely, are they true to their word and securely holding all of the underlying bitcoin. With publications from several major crypto companies proof of stock After the FTX crisis, Grayscale declined to allay customer fears.
“Due to security concerns, we do not make such on-chain wallet information and confirmation data publicly available through cryptographic proof-of-reserve or other advanced cryptographic accounting process,” Grayscale wrote in a statement.
7) We know that the preceding point will be particularly disconcerting to some, but the panic spread by others is not a sufficient reason to circumvent the complex security arrangements that have protected our investors’ wealth for years.
— Grayscale (@Grayscale) November 18, 2022
As I wrote at the time, I really can’t fathom how security concerns are a factor here. The blockchain is built so that such information is available to the public.
the bottom is really confusing @grayscale
Would love to expand beyond just “security”
Does anyone have suggestions on how the disclosure on chain wallet might be a security concern?
The only thing I can think of is quantum concerns (p2pk) but I don’t think it belongs here? https://t.co/0QcVO6wV1x
— Dan Ashmore (@DaniiAshmore) November 19, 2022
final thoughts
Overall, the discount reflects investor concern around Grayscale, as well as the additional fees and other hurdles that exist compared to owning the underlying. Arbitrage trades are self-destructive by nature, and so it is remarkable that the discount is so large and has persisted for so long.
On the other hand, there is also a risk here, because the same thing I’ve been writing about for some time – a lack of transparency – This means that what is going on behind the scenes cannot be known for 100% certainty. And that’s why we’re seeing 50% off.