Why is the Grayscale GBTC premium only 2.77% left? Are representative agencies bearish?

On January 22, the premium of the grayscale Bitcoin trust product GBTC secondary market compared to the primary market hit a new low of 2.77% since 2016. In other words, the premium of GBTC price compared to BTC is only 2.77% %. The highest premium of GBTC was as high as 132% before, and in the second half of last year, the average premium was nearly 17%.

This round of Bitcoin bull market is recognized as a bull market led by institutions, and GBTC is an important entrance for institutions. Of course, not all institutions that buy GBTC are unanimously optimistic about Bitcoin, because of the mechanism designed by Grayscale Trust, some institutions enter the market only for arbitrage.

Rhythmic BlockBeats This article will explain why the premium of GBTC is only 2.77%, how institutions can carry out simple arbitrage, and the possible impact.

Grayscale trust operation mode

Contrary to what many investors understand, Grayscale itself does not directly buy or hold Bitcoin. The Bitcoin trust established by Grayscale supports users to exchange trust shares GBTC through BTC or cash. Each GBTC corresponds to the corresponding BTC, and BTC is hosted in Coinbase Custody.

This means that the BTC currently held by Grayscale belongs to the institutions behind it that hold GBTC or Personally owned, not grayscale owned.

In 2014, Grayscale Bitcoin Trust was reviewed by the SEC due to its redemption method, and was subsequently fined $50,000 and In 2016, GBTC was closed to redeem BTC.

At present, there are three ways to obtain GBTC:

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The first is to buy GBTC directly in the OTC market. The GBTC obtained in this way has no lock-up time and can be bought and sold at will;

The second is to use the BTC in hand to purchase from Grayscale. The GBTC obtained in this way needs to be locked for half a year, and can be sold through the OTC market after half a year;< /p>

The third way is to use cash to purchase from Grayscale (Grayscale will use cash to purchase BTC), this way to get The GBTC also needs to be locked for half a year, and can be sold through the OTC market after half a year.

Greyscale’s daily newly added holding tokens mainly come from the second and third subscription methods.

GBTC becomes the target of institutional arbitrage

According to Grayscale's 2020 fourth quarter report data, institutions accounted for 93% of the funds flowing into Grayscale in the fourth quarter of 2020, or about US$3 billion.

The entry of a large number of institutions does not mean that they are optimistic about Bitcoin, and it may be profitable, because Grayscale There is room for arbitrage between the Bitcoin Trust's GBTC primary market and the secondary market.

As GBTC, which has launched the world’s largest and most liquid US stock market, it enjoys a certain liquidity premium . At the same time, in addition to the liquidity premium, because Grayscale Bitcoin Trust is one of the few channels through which compliant financial institutions can invest in Bitcoin, this also lays the foundation for GBTC to generate a premium in the secondary market.

There is a price difference between the primary and secondary markets, and investors are motivated by profit to carry out arbitrage to smooth out the price difference.

Arbitrageurs borrow bitcoins and open short orders of equal value at the same time, and then withdraw bitcoins to Grayscale Apply for GBTC purchase. After 6 months, sell GBTC to get cash, and use the cash to buy the bitcoins borrowed at the beginning, and return the bitcoins while closing the short position. In this whole set of operations, arbitrageurs earn the price difference between Bitcoin futures and spot prices, as well as the price difference between the GBTC primary market and secondary market.

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Why is the GBTC premium only 2.77% left?

On January 22, 2020, the GBTC secondary market premium fell by 2.77%, the lowest since 2016.

GBTC Level 2 Market premium, source: Bloomberg

Why is the GBTC premium only 2.77% left? There are two main reasons for this. One of them is the recent decline in the Bitcoin primary market, which has intensified panic. This decline led to liquidation of encrypted assets worth US$1.34 billion.

Bitcoin recent Market trend

Another more important factor that leads to the reduction of GBTC premium is that the huge amount of Grayscale Trust’s GBTC expires to be unlocked. Grayscale official January 15 Announcement issued (unlocked) 37,036,200 GBTC shares, totaling approximately 35,000 bitcoins, worth over US$1.2 billion. The number of GBTC unlocked this time accounts for 5.47% of the total.

According to dcresearch data, GBTC has had a minimum premium of -0.3% since its inception, which appeared in 2015.

GBTC premium history Data, source: dcresearch

However, the total market value of Bitcoin in 2015 was only more than one billion, which is different from today’s six The market value of 100 billion cannot be compared. Moreover, what has formed a consensus among many investors is that this round of market is an institutional bull guided by institutions. This suggests that institutions are an important part of market participation.

Among the institutions participating in GBTC, there are arbitrage institutions that are extremely concerned about premiums.

Once the long-term negative premium or negative premium is too high, it will be a devastating blow to the operation of arbitrage institutions. As described above, the main profit earned by arbitrage institutions comes from the premium between the primary and secondary markets of GBTC. Once the premium disappears, the subsequent entry of arbitrage institutions will decrease. If the premium is negative, institutions using high-leverage arbitrage may face the risk of being liquidated, which will lead to the continued weakening of Bitcoin's primary market price, forming a death spiral.

Of course, once a negative premium is formed, Grayscale Investment can release Bitcoin spot redemption if the regulation allows , which avoids the possibility of high leverage arbitrage institutions being liquidated.

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