Demystifying the truth that Grayscale has been buying, buying, and buying
Original source: block impression
Grayscale, the "grayscale" in the currency circle population, has never stopped buying bitcoin, even if it exceeds 17,000 US dollars 1 high-priced bitcoin.
On November 17, Grayscale’s BTC trust holdings increased by 1773 BTC. As of now, Grayscale holds more than 500,000 bitcoins, accounting for 2.38% of the total bitcoins. If the lost bitcoins are removed, the number of bitcoins owned by Grayscale should account for 3.37% of the real circulation.
Shooting boldly, buying as much as you produce, and like Pixiu, only seeing in but not out, many people began to face up to this very popular Bitcoin fund: Who the hell is buying? Why do investors prefer to pay a high price management fee of 2% instead of buying Bitcoin directly? Is it really profitable to do so?
With everyone's concerns, we will take a good look at grayscale today.
After reading this article, you will get answers to the following questions:
Why does Grayscale only buy but not sell?
Why do you want to buy Bitcoin on Grayscale?
Who is buying Bitcoin behind Grayscale?
How to take advantage of GBTC arbitrage?
Who is "accepting" GBTC in the secondary market?
1. The background and introduction of grayscale
Briefly talk about the background of grayscale. Behind Grayscale is DCG—Digital Currency Group, which is an invisible giant in the currency circle, and its business layout covers half of the currency circle. At the same time, DCG Group is inextricably linked with MasterCard, NASDAQ, the Chicago Stock Exchange, and the Bitcoin core development team.
As an asset management company, Grayscale has a wide range of products, including BTC trust, BCH trust, ETH trust, ETC trust, LTC trust and so on. Among them, both the BTC trust and the ETH trust have been registered with the SEC in the United States. The compliance qualification makes Grayscale have no competitors in the similar market. As long as the Bitcoin ETF is not approved for a day, Grayscale enjoys an absolute monopoly.
Greyscale’s products have a minimum investment threshold, GBTC’s threshold is $50,000, and other trusts are generally $25,000. All assets are kept in cold wallets in Coinbase Custodian, which charges an annual management fee ranging from 2% to 3%, with the Bitcoin Trust having the lowest management fee of 2%. (Note: Coinbase is also owned by DCG)
Obviously, gray The purpose of designing these products is not to sell to small retail investors. Its target audience is "accredited investors", which refers to those individuals with a net worth of more than $1 million or two-year income of more than $200,000, and individuals with assets of more than $5 million. institutional investors. Grayscale’s 2020 Q3 report shows that 90% of its clients are institutional investors.
Second, Bitcoin trust Design
Because the scale of GBTC accounts for more than 90% of Grayscale's overall asset management scale, we will take it out here separately.
Issued in 2013, GBTC was the first publicly traded Bitcoin investment vehicle. Until January 2020, GBTC was successfully registered with the US SEC. Compliance allows it to harvest a broader market, and Grayscale’s newly added assets under management in the past two years far exceed the accumulated assets of the past six years.
1. Design features of GBTC
(1) Non-redeemable
In order to meet the SEC's regulatory rules, Grayscale has set up an "non-redeemable" mechanism for the trust. Investors can only buy it and cannot redeem it. This feature directly eliminates the liquidity crisis of Bitcoin sellers, and completely eliminates the chance of selling and smashing the market. This is why Grayscale is called Bitcoin "Pixiu".
(2) GBTC shares can be traded in the secondary market
Although GBTC cannot be redeemed, GBTC shares can be traded in the form of stocks Circulation on the secondary market. However, according to SEC regulations, the GBTC held by investors must be locked for 6 months before they can be traded in the secondary market.
(3) The service fee is based on Bitcoin
GBTC’s 2% annual management fee is charged on the currency standard, so over time With increasing, the bitcoin content of each GBTC will become less and less. When it was released in 2013, each share of GBTC was about 0.001 bitcoin, and only 1 bitcoin was owned by buying 1,000 shares, but now a GBTC share only contains 0.00095236 bitcoin.
2. The scale and share of GBTC
You can find it on the official website of Grayscale Data related to GBTC, such as AUM, issued shares, and the number of bitcoins per share.
According to these data, we can calculate how many bitcoins Grayscale has purchased in total: Issued shares*bitcoins per share=540935800*0.00095236 ≈515,000 According to the calculation of 17500 US dollars, the value is about 9 billion US dollars.
(data date: 2020/11/19)
3. Subscription mode of GBTC
GBTC accepts two investment methods: cash purchase or bitcoin purchase. The purchase method is as follows:
( Note: Genesis is a subsidiary of DCG Group )
Guess which subscription model is the most?
The answer is, the Bitcoin investment model.
In the 2019 Q3 report, Grayscale indicated that from January to September 2019, 79% of investors chose to invest in kind (Bitcoin capital contribution). In other words, most of the bitcoins flowing into GBTC come from bitcoins already in circulation on the market, and it is not that "Grayscale is buying newly mined bitcoins" as everyone thinks.
Investors clearly own bitcoins, why would they rather hand over 2% of their bitcoins every year currency, but also to exchange BTC for the GBTC that can never be redeemed?
Grayscale spent a lot of space on its official website to convince everyone why they should buy GBTC shares instead of buying Bitcoin directly. The reasons it gives are:
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Don't worry about the security of bitcoin storage.
Avoid the impact of non-compliance, theft, price decline, etc. when purchasing on the exchange.
It is similar to a security, easy to transfer to beneficiaries under estate law.
These reasons are not enough to support Grayscale’s strong bitcoin inflows in the past two years.
You should have heard of the news that some Nasdaq-listed companies bought Bitcoin a while ago, obviously buying directly can save 2% of the annual fee , why do you have to buy on Grayscale? If it is really for the sake of security, it is even more unnecessary: Grayscale itself does not store bitcoins, and all investors' bitcoins are stored in Coinbase's custody institution. There are many professional Bitcoin custody service providers on the market, and the handling fee is lower than that of Grayscale. If institutional investors really want to enter Bitcoin, Grayscale is not the best option.
Obviously, compared with Grayscale’s marketing ability, “profitability” is the reason why investors spend a lot of trouble. This is also the difference between Grayscale and The essential reason for other similar fund products.
3. How to use GBTC to arbitrage?
GBTC on the secondary market has been at a premium for a long time: the market circulation value of each GBTC > the value of Bitcoin included.
In the past 5 years, the average premium of GBTC was 38%, and the highest reached 132%. This piece of "pure land".
The easiest way to arbitrage is Investors use cash (or Bitcoin) to buy GBTC shares, and after the 6-month lock-up period, choose the right time to sell the shares in the secondary market, and the rest of the cash difference after deducting related expenses is the profit. The biggest risk of this method is that Bitcoin will fall, resulting in no profit or even loss. In this case, reverse shorting can be used for hedging.
The second way of arbitrage is to use Bitcoin lending arbitrage.
Institutional investors borrow BTC on the lending platform and hand it over to Grayscale to replace the primary market share. For the lending platform, the premium income minus interest and other expenses is profit.
Greyscale’s brother company, Genesis, provides this kind of loan service. The figure below shows the growth of Genesis loan service. Since 2020, business demand has soared. It even issued a loan of 5.2 billion US dollars. It is difficult to say that such an increase has nothing to do with Grayscale.
The third arbitrage method is Use GBTC shares to borrow and borrow for arbitrage.
Investors directly borrow GBTC shares and sell them in the secondary market at an appropriate time. At the same time, use cash or Bitcoin to exchange for GBTC shares in Grayscale, and repay the borrowed GBTC shares after the lock-up period. There are two fees involved here. One is the borrowing cost of GBTC. According to online information, the current borrowing cost is close to 15%. The second fee is an annual fee of 2%. If the GBTC premium does not exceed 17%, then this strategy will fail .
The fourth way is to lock in premium arbitrage.
Investors use cash or Bitcoin to exchange for GBTC in Grayscale, and at the same time, when the market price of GBTC is higher than the net asset value, borrow GBTC off-site and short. In the end, no matter whether GBTC rises or falls, the profit is fixed.
By comparing and observing the number of issuances and short selling ratio of GBTC, We can find that whenever the number of GBTC issuance slows down, the proportion of shorting in the market begins to stagnate or even decrease.
Here is a summary:
In the first case, use the market price difference to arbitrage. When the price of GBTC is higher than the initial cost, it is possible to make a profit;
The second case is Bitcoin lending arbitrage. The premium part of GBTC when selling is deducted from the relevant expenses, which is the profit;
The third case is GBTC share loan arbitrage. When selling, the GBTC premium exceeds 17% (this value will fluctuate up and down) to be profitable;
The fourth situation is to short GBTC arbitrage. The premium minus 17% (this value will fluctuate up and down) is the profit margin.
The first case is more dependent on the current price of Bitcoin. The second and third strategies are more dependent on the GBTC premium. The higher the premium, the more people who realize arbitrage, and the higher the demand for Bitcoin at this time. This is one of the reasons why some people "buy" Bitcoin at Grayscale at prices above $15,000. The fourth situation is very suitable for hedge funds. The operation is complicated, but the premium can be locked in advance, and the market risk is small.
Fourth, who buys Bitcoin behind Grayscale?
Grayscale is the biggest "blind player" in the Bitcoin buyer's market in 2020, as seen from the picture below , This growth trend has not stopped, so, who is behind the gray scale and continues to "recharge" Bitcoin?
According to the information publicly disclosed by Nasdaq, as of the end of September 2020, GBTC has a total of 32 institutional investors. Here we only list institutions that hold more than 10,000 GBTC:
BlockFi holds the most positions, accounting for 4.5% of GBTC shares. It is a well-known lending company in the currency circle. Users deposit BTC or ETH to obtain interest. At the same time, BlockFi also provides loan services to lend funds to institutional users. Investing in GBTC is also one of its ways to improve asset liquidity and profitability.
The second largest holding is Three Arrows Capital, which is currently one of the most active cryptocurrency hedge funds. It has successively invested in projects such as AAVE, Synthetix, and Kyber, leading the wave of DeFi this year, and has gained a lot. Its co-founder Su Zhu has a strong bullish sentiment on GBTC, saying inflows will drive a premium.
Not all institutions are in the currency circle, such as Ark Investment (AKR), its founder Catherine Wood has a name on Wall Street: female version Buffett. She loves technological innovation and once invested in Tesla when everyone was not optimistic. She is also a well-deserved die-hard fan of Bitcoin, once declared that Bitcoin is "far greater than Apple." Back in 2015, when the price of Bitcoin was below $250, a large amount of GBTC was purchased. Until September of this year, the fund was still increasing its holdings of GBTC.
The famous "Rothschild Investment Company" is also on the list of GBTC holdings. There are not many positions, 24,500 GBTCs, accounting for only 5/10,000 of all GBTC shares, currently worth about 500,000 US dollars. Although these hundreds of thousands of dollars are almost negligible for a company that manages more than a billion dollars in assets, it also means that this ancient capital has not completely ignored the cryptocurrency field.
Actually, the above list is only a small part of grayscale buyers. After a little calculation, you will find that all the institutions in the above picture add up , less than 15% of the total amount of GBTC—more shareholder information has not been made public in the market, and if the mysterious power behind Grayscale is not voluntarily disclosed, the general public may never know about it real face.
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