Why does Grayscale Bitcoin Trust GBTC have a high premium?

Original source: OKEx Research

Original title: "OKEx Research: The Mystery of the High Premium of Grayscale Fund"

In Encryption In the asset market, if you want to ask which institution has attracted the most attention recently, many people may choose Grayscale Fund. Grayscale Investments is a subsidiary of digital currency group DCG (Digital Currency Group) established in 2013. Grayscale Asset Management provides investors with a legal channel to buy and sell cryptocurrencies. The main mode of operation is to set up a cryptocurrency trust fund to allow investors to participate in the purchase.

According to the latest data, as of the end of October, the total amount of cryptocurrency management has exceeded 7.5 billion US dollars, making it the largest digital asset management institution in the world. At the same time, according to the third quarter data released by Grayscale Assets, the asset scale in March 2020 was only US$2.2 billion, and the asset management scale increased by 240.91% in the past six months.

Figure 1. Total Assets of Grayscale Asset Management Company     Source: Grayscale Fund Official Website

Of course, another important reason why Grayscale Fund has attracted the attention of the market is its high premium. For example, according to the data on November 19, the price of GBTC per share is 20.01 US dollars, and the current value of BTC corresponding to one share of GBTC is 16.98 US dollars, which means that the price of GBTC is 17.84% higher than the spot price, and there is an obvious premium . And since 2017, GBTC has had a long-term and stable high premium.  

Figure 2. Market price and net value of GBTC  Source: Grayscale Fund Official Website

Many people wonder where the high premium of Grayscale Fund comes from, and they often draw the conclusion that people are stupid and have more money based on market experience. In fact, if you analyze carefully, you will find that the above conclusions are not tenable. According to the first quarter report of Grayscale Assets, 88% of investors are institutional investors and 5% are high-net-worth qualified investors. The user portraits of these investment groups are difficult to match with "people who are stupid and rich".

Figure 3.  Types of Grayscale Asset Investors 

In Understanding Grayscale Before discussing the reasons for the high premium of the Grayscale Fund, we first need to know what the premium of the Grayscale Fund is.

Take the Bitcoin trust fund GBTC under Grayscale Fund as an example. GBTC is a trust fund product similar to ETF, which can be purchased in the primary market at the same time Redemption and secondary market transactions, so there are two prices of real-time net value and real-time market price. When the net value is less than the market price, it is called a fund premium, but when the net value is higher than the market price, it is called a fund discount.

For general ETF funds, there will not be a high discount or premium because of the arbitrage mechanism of ETF:

When Net value > At the market price, arbitrageurs will buy ETF fund shares in the secondary market, and then use the ETF fund shares to redeem the underlying assets (such as a basket of stocks or other assets) in the primary market to earn the price difference

When the market price > net value, arbitrageurs will use the underlying assets to purchase ETF fund shares in the primary market, and then sell the ETF in the secondary market Fund shares, earn price difference

It is precisely because of the fund transaction in the secondary market and the purchase and redemption mechanism in the primary market at the same time, arbitrage transactions can be carried out when there is a difference between the net value of the fund and the market price, so ETF Fund discount premium is very small.

So where does the high premium of Grayscale Fund come from? There are two main reasons: one is that the arbitrage mechanism is not smooth, and the other is market speculation.

(1) Unsmooth arbitrage mechanism

In traditional ETF fund transactions, The trading system of T+0 or T+1 is usually adopted, that is, the ETF fund shares purchased on the same day can be sold on the same day or the next day; however, for the funds under Grayscale Assets, taking GBTC as an example, investors can To purchase GBTC shares with cash or BTC, the obtained shares must be locked for 6 months before they can be sold in the secondary market, which prolongs the time for arbitrage transactions.

On the other hand, the SEC investigated GBTC in 2014. Since then, Grayscale Fund has deliberately stopped GBTC on the grounds that the SEC will not pass the review Due to the redemption mechanism, investors can only sell and leave the market through the secondary market.

Therefore, the high premium of the GBTC fund largely comes from the market’s premium for risk: after buying GBTC fund shares, investors can only pass the secondary The market is out, and the trading time is limited to 6 months later, which means that investors must bear risks for up to 6 months-even if Bitcoin plummets during this period, GBTC investors cannot sell. The following simple case can just reflect the problems caused by the unsmooth arbitrage mechanism:

Scenario: At a certain moment we have a trading opportunity of $100

p>

Scheme 1: Trade now and get $100 profit

Scenario 2: Trade after 6 months, $100 profit chance is uncertain Is there

Option 3: Pay $30 in advance and wait 6 months before trading, $100 profit opportunity is uncertain

From From the perspective of behavioral economics, most investors will choose option 1 to avoid future uncertainties; if the transaction cannot be completed immediately, they must pay a certain risk premium to investors, that is, option 3. Otherwise, most investors will have doubts and choose not to buy GBTC funds out of the need to avoid risks.

(2) Market sentiment

If we only attribute the high premium of Grayscale Fund to For the risk premium, it is clear that other phenomena cannot be fully explained. According to relevant reports, since the beginning of this year, the current LTC premium of Grayscale Fund has reached 3687%, which obviously cannot be fully explained by the risk premium.

As we mentioned earlier, the generation of risk premium comes from the uncertainty of the future. But what if investors were optimistic about the future? Obviously, in the eyes of investors at this time, the risk premium part is completely risk-free and has become a rare "arbitrage" part.

This is also what is happening in the market right now, as we are currently in a big bull market in the cryptocurrency market, which makes investors very optimistic about the future price of cryptocurrencies .

After making the assumption that the price of the currency will rise in the future, in the eyes of many investors, the high premium in the secondary market of Grayscale Fund is completely free, so they all buy grayscale funds one after another. Excessive demand for fund shares has resulted in higher and higher fund premiums. Therefore, the high premium of Grayscale Fund also has a strong market sentiment component.

In general, the high premium phenomenon of Grayscale Fund is due to the inadequacy of the grayscale fund arbitrage mechanism The product of smooth flow and market sentiment. Due to the lock-up policy of Grayscale Fund in the secondary market and the regulation that assets cannot be redeemed in the primary market, the market must pay a certain risk premium to investors; and due to the rising market sentiment, most investors are concerned about the future market. Optimistic, in order to actively obtain this part of the risk premium, grayscale fund shares have been bought one after another, further raising the premium of the fund in the secondary market.

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