Demystifying the Grayscale money empire: Institutions are pouring in because of arbitrage, not bullish on Bitcoin

Original title: "OKEx Research: "Money Empire" under the grayscale layout"

Original source: OKEx Research

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Since October, with the popularity of the Bitcoin market, Grayscale Fund has once again become the focus of attention. Labels such as "Giant Whale", "Compliance", and "Wall Street" have always accompanied it. Many people think that Grayscale Fund is synonymous with "institutional investors entering the market". Even in the previous few weeks, whenever Grayscale was trading normally on weekdays, Bitcoin was trending up; on rest days, Bitcoin was trending down, although there is a considerable element of coincidence in this phenomenon, but this is not the case. It prevents everyone from seeing Grayscale Fund as the "savior" of the Bitcoin market.

However, recently watching "The Wolf of Wall Street", one of the plots is impressive: when the legendary stockbroker played by Leonardo When you give a pen to someone around you and ask them to sell it to you, ordinary people will only talk about a lot of advantages of this pen, but his good buddy Brad says: "Do me a favor and put Your name is written on a napkin." By creating demand, people will willingly buy stocks, which is an important reason why Leonard can become the "Wolf of Wall Street".

For this reason, I can’t help but think of Grayscale Fund. Viewed as an artificial demand rather than a market supply, some interesting conclusions can be drawn.

Re-discuss the "gold content" of Grayscale Fund

Whenever When people talk about Grayscale Fund, it is often difficult to understand. Because it is not like ordinary open-end funds, there are not only subscription and redemption, but also secondary market transactions. The reason is that although the Grayscale fund is called a "trust investment fund", it is actually a "castrated version" of the ETF fund.

Currently, Grayscale Fund has released 9 trust funds with a single asset (BTC, BCH, ETH, ETC, ZEN, LTC, XLM, XRP, ZEC). Taking GBTC fund as an example, like all ETF funds, GBTC is also divided into two major markets:

The primary market is the issuance market, and investors can use BTC Or purchase GBTC shares in cash; correspondingly, investors can also exchange GBTC shares for BTC through the primary market, and GBTC shares will be canceled immediately;

Second The primary market is the trading market. Investors can trade their GBTC shares in the secondary market. The trading platform is OTCQX, which adopts an inquiry trading system.

However, there are still two differences between GBTC and traditional ETF funds:

First of all, Grayscale Bitcoin Trust has suspended its redemption mechanism since October 28, 2014. Although the GBTC of Grayscale Fund has passed regulatory approval, it still has not submitted a redemption plan to the SEC.

Secondly, in traditional ETF fund transactions, T+0 transactions can be realized between the primary and secondary markets, that is, the ETF fund shares purchased in the primary market on the same day It can be sold on the secondary market on the same day; a basket of stocks redeemed through ETF funds can also be sold on the secondary market on the same day; however, the current subscription shares of GBTC in the primary market can only be sold in the secondary market after 6 months .

Of course, we should also pay attention to the secondary trading market of GBTC---OTCQX.

Whenever investors mention Grayscale Fund, they will involuntarily label it as "tall". The important reason is that Grayscale Fund's Each of the funds can be traded in the US securities market.

After nearly 200 years of development, the US securities market has formed a multi-level capital market system. According to the high quality of the company's stock and the degree of market openness, the US capital market system is mainly divided into the following levels:

The first level is the New York Stock Exchange, Nasda Gram Global Select Market and NASDAQ National Market, with relatively high listing standards, are mainly for the national market of super multinational companies;

Second tier It is the NASDAQ small capital market and the National Exchange, mainly for high-tech companies in the United States and the national market for small and medium-sized enterprises in the United States. The listing requirements are relatively low, and it can meet the needs of innovative companies characterized by high risks and high growth. Listing requirements, most Internet companies in China are listed on this market;

The third layer is the US regional securities market, such as the Cincinnati Stock Exchange, Philadelphia Exchange Sowait is a market that mainly trades local corporate securities

The fourth layer is the pink sheet market, and OTCQX belongs to the pink sheet market.

So what is the pink sheet market? In the movie "The Wolf of Wall Street", there is such a segment: Leonardo lost his job after the stock market crash in 1987, so he had to go to an "Investor Center" to work as a stockbroker. However, this "investment center" is mainly engaged in the pink sheet market business (in the movie we can see those stock quotes printed on the pink sheet).

It should be emphasized that the US Pink Sheets is not a stock exchange. Company stocks traded through the US pink sheet market do not need to bear any requirements, such as submitting financial reports to the US Securities and Exchange Commission (so we can see that, except for the GBTC and ETHE products approved by the SEC, the rest of the trust fund products have not been submitted to the US Securities and Exchange Commission. SEC reports, but can still be traded on OTCQX). These companies traded on the pink sheet market are often small companies with minority shares. These companies are generally small in scale, have less income, and are even bankrupt companies. Basic listing requirements for US trading institutions.

So while there are some high-quality corporate stocks (mainly depositary receipts) that are located outside the US in this market, the vast majority of the market is US-based "junk stocks" and "penny stocks". For example, in the movie, the "cutting-edge high-tech company" stock that Leonardo sells to customers that "is about to get a radar detector license" is actually just a "family company" in a small white house in the Midwest , but it is also true, if Leonardo can successfully sell these stocks, he can get a 50% commission.

Of course, although the pink sheet market is synonymous with "junk stocks" and "penny stocks", the pink sheets The single market also has market classification, which is divided into three levels from high to low: OTC QX, OTC QB, and OTC Pink. Among them, Grayscale Fund belongs to the OTCQX trading platform.

OTCQX is the highest-level trading market in the OTC market in the United States. All companies trading stocks here must meet the standards of information disclosure, finance and management at the same time (These standards are not set by the SEC, but set by the trading platform). At the same time, a certified third-party investment bank or legal advisor must provide proof of support.

So from the actual situation, Grayscale Fund is just a "castrated" ETF fund, and its trading platform is only the US financial market system The "third-rate platform" does not have a high gold content.

"Money Empire" under the grayscale layout

Pass the above Analyzing, we may be curious, since the "gold content" of Grayscale Fund's products is not high, why are there so many investors flocking to them?

Perhaps many people will explain it with such foolish statements as "convenience and safety" and "order execution is cost-effective" on the official website of Grayscale. Since small and medium-sized investors will buy and keep encrypted digital currency by themselves, shouldn't institutional investors? Are institutional investors looking at "compliance channels"? Obviously not, because CME has already launched "BTC futures". Is there a big difference between double-leveraged BTC futures and BTC spot? Perhaps the transaction fee for one-year rollover of the former is cheaper than the management fee of Grayscale Fund, and it can also increase leverage and save capital costs as positions are closed.

Perhaps, for everyone concerned about the Grayscale Fund, the starting point for analyzing the problem may be wrong --- the narrative logic of the public has always been: Because institutional investors are optimistic about the future prospects of Bitcoin, they purchased Bitcoin through the compliance channel of Grayscale Fund.

However, the closer to the real situation is: because the Grayscale Fund is "profitable", institutional investors buy a lot. The "profitability" here has nothing to do with the future prospects of Bitcoin, but the arbitrage space of the product itself.

The arbitrage space here mainly comes from the high premium of Grayscale Fund. Taking GBTC as an example, as shown in the figure below, the GBTC secondary market price is basically consistent with the BTC price trend, but the GBTC secondary market price is much higher than the GBTC net value, and has remained at about 20% for the past year.

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

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

When the market price > net value, arbitrageurs will be at the first level The market uses the underlying assets to purchase ETF fund shares, and then sells ETF fund shares in the secondary market to earn the price difference;

So why is there a high premium for Grayscale Foundation? ? The reason is that the grayscale fund we mentioned earlier is a "castrated version" of the ETF fund. Due to the cancellation of the redemption mechanism and the need to lock the position for 6 or 12 months, the arbitrage mechanism is not smooth, so there is a high premium Phenomenon.

If you go back to the beginning of the article, Leonardo's famous saying: By creating demand, people will be willing to buy stocks. The same is true for grayscale funds, which attract investors to buy grayscale funds by artificially creating a high premium phenomenon. This is why investors favor Grayscale Fund so much, and it has nothing to do with Bitcoin itself.

Therefore, we have seen a rare scene in the cryptocurrency market of "standing up and making money", which not only wins a good reputation, but also earns a lot of money. Fei's income:

Greyscale Fund without a redemption mechanism can only buy BTC, but not sell it, and permanently lock the position, which is conducive to the rise of BTC prices; Even if it is not purchased in kind, it will bring a huge amount of funds to the cryptocurrency market; the withdrawal is completely borne by the traditional capital market, and will not bring selling pressure to the cryptocurrency market.

The biggest concern of fund products is the risk of redemption, but grayscale funds without a redemption mechanism mean that they can charge 3% per year for an "indefinite period" Fund management fee

Of course, this kind of man-made demand not only brings huge benefits to Grayscale Fund itself, but also to the Genesis Corporation brings high externalities.

Currently, Genesis mainly includes four major businesses: trading business, lending business, derivatives business and custody business. In addition to the recently opened custody, the other three major businesses of Genesis can benefit from the recent rapid growth of Grayscale Fund.

First of all, the transaction business, Grayscale Fund’s cash purchases in the primary market are all authorized to Genesis to buy BTC in the spot market.

The second is the lending business. Unlike other cryptocurrency lending platforms, Genesis can directly pledge GBTC/ETHE to borrow BTC/ETH. This means that investors can use the fund shares in their hands for borrowing, and then apply for the purchase of fund shares, so as to amplify leverage and expand income. As long as the high premium in the secondary market is greater than the additional costs such as the management fee rate and lending interest rate of Grayscale Fund, then arbitrage will occur. Similarly, we can observe that since the second half of this year, with the continuous expansion of the scale of Grayscale Fund, the scale of Genesis's lending business has also expanded rapidly, and the growth rate of cumulative loan issuance has increased significantly.

The last is the derivatives business, which is often overlooked by everyone. At present, investors in the cryptocurrency market generally have a misunderstanding: this part of the high premium can be arbitraged through cash/cryptocurrency. The general method is to borrow cash/cryptocurrency from the lending platform, and then subscribe to Grayscale’s bitcoin trust shares. After the 6-month lock-up period of the trust share expires, it will be sold through OTCQX. If there is a positive premium space, the remaining part after returning the principal and interest of the lender is the profit of the arbitrageur.

However, the above-mentioned arbitrage scheme is very risky, because it does not eliminate the price risk of Bitcoin itself. For example, Bitcoin has fallen by 30% within a month, but GBTC has always had a high premium of 20%. Even so, investors are losing money. Therefore, for institutional investors, in addition to the above-mentioned arbitrage operations, they also need to sell corresponding cryptocurrency short positions in the derivatives market (such as CME, Genesis's derivatives business) to hedge risks.

According to the financial report of Genesis in the third quarter of this year, its derivatives business has become one of the fastest growing businesses, with the scale reaching US$1 billion in the third quarter , the main reason is that customers of Genesis's lending business need to use derivative products for hedging to reduce investment risks.

Similarly, according to the disclosure of the financial report submitted by the Grayscale Fund to the SEC, the Fund of Funds of the Fund holds at least 1% of the shares of Coinbase, while the Grayscale Fund The related encrypted assets are managed by Coinbase, and custody fees are charged.

It can be seen from the above that Grayscale Fund brings more than just 3% management fee Such income, but expanded the business territory of DCG Group. By creating the arbitrage product of "high fund premium", Genesis has expanded its own trading, lending and derivatives business, forming DCG Group's unique "Grayscale Fund Moat", and creating a "money empire" in the cryptocurrency market.

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