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Why is Wall Street abandoning the Grayscale Bitcoin Trust when capital stops flowing in?

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Demand for Bitcoin investment products remains high despite the significant drop in GBTC's inflows.

Why is Wall Street abandoning Grayscale Bitcoin Trust as Capital Stoppers?

Originally written by Glendon, Babbitt

Grayscale is no longer the only option for investors

Grayscale Bitcoin Trust is one of the few products that offers hedge funds, endowments, pension funds and family offices a way to invest in bitcoin without requiring users to own the digital asset.

As a result, capital inflows into GBTC have been increasing. Last year, for example, Wall Street investors were reported to have deposited about $18.2 billion in the fund, a measure of growing institutional interest in the cryptocurrency industry. Instead, the decline in capital inflows reflects institutional withdrawals or profit-taking, as has happened since the first quarter of 2021.

(Note: Profit-taking, also known as technical correction, usually refers to the holders of a stock or futures contract, option contract, after the market value has changed and appears in their favor, take the initiative to change the position of the transaction so that the book profit into actual profit.)

On-chain analytics service Skew reported on Thursday that GBTC will no longer attract new investment after February 2021. Capital inflows stopped when GBTC started trading at a negative premium to its net asset value (NAV). NAV represents the underlying market value of the assets held.

资本停止流入，华尔街为何开始抛弃灰度比特币信托？

As the premium for Grayscale Bitcoin Trust flipped negative, money stopped flowing in. Source: Skew

At the beginning of this year, GBTC was priced at a 30% premium. But the latest Skew chart shows a premium of -11.40%. Before that, GBTC's premium to its net asset value reached a record low of -40.20%.

Meanwhile, GBTC's premium recovered slightly in early April after Grayscale announced its intention to convert its trust structure into an exchange traded fund. Grayscale's decision came as competition grew with the launch of new Canadian Bitcoin ETFs, largely because they offered better expense ratios than Grayscale.

Purpose, for example, is the world's first physically settled bitcoin ETF, with an expense ratio of 1 per cent. Other Canadian bitcoin ETFs such as Evolve and CI Galaxy offer fee ratios of 0.75% and 0.40%, respectively. However, Grayscale's expense ratio is as high as 2 percent.

In addition, commercial competition with the Canadian Bitcoin ETF may also have hindered capital flows to GBTC. Purpose, for example, has raised $1 billion a month since it launched in February, reflecting high demand for bitcoin investment products despite a sharp drop in inflows to GBTC.

Musk has unnerved Wall Street's bitcoin investors

During that time, the spot price of bitcoin has also been driven higher by Tesla CEO Elon Musk. The cost of buying a bitcoin climbed from a low of $38,057 on Feb. 8 to a high of $64,899 on April 14 after Tesla disclosed that it held $1.5 billion worth of BTC on its balance sheet, leading investors to believe that more companies would replace some of their cash holdings with bitcoin.

But GBTC's premium remained negative during bitcoin's price rally from February to April.

When bitcoin started to fall due to profit-taking, China's cryptocurrency ban, and rumors of a bitcoin sell-off from Tesla, the GBTC premium fell to a new all-time low of -40.20%.

资本停止流入，华尔街为何开始抛弃灰度比特币信托？

The bitcoin correction accelerated after Musk criticized the cryptocurrency's carbon footprint. Source: BTC/USD on TradingView

Daniel Martins, founder of independent research firm DM Martins Research, emphasized that the drop was a sign that Wall Street's appetite for bitcoin-related investments was waning, especially after the cryptocurrency became the apparent victim of Musk's anti-bitcoin tweets in mid-May, At one point, Bitcoin's valuation was cut in half.

Martins further points out that Grayscale's annualized return is 500% higher than the Nasdaq's, but the correction is also worse than the 2008 recession -- 82% versus 17%. This makes Grayscale's bitcoin investment product an "overleveraged bet" with poor risk-adjusted performance.

"The volatility of GBTC is almost nine times that of the Nasdaq: 145 percent versus 17 percent," he added.

Will Grayscale ETF Appear in 2021?

Martins' statement highlighted the possibility that the GBTC premium could face further downside as investors look for a more stable alternative to Bitcoin's ongoing price correction.

In addition, it competes with other investment alternatives to digital currencies, including cryptocurrency custodial services that offer institutional investors a lower fee to hold real cryptocurrency assets, further increasing the risk of capital inflow restrictions.

ETF analyst Sumit Roy wrote that Grayscale's conversion to an ETF could end the era of its 2% fee, That's because it has to compete with an ETF army led by Bitwise, Vanguard, Fidepty, CBOE and others.

"But no matter what happens, GBTC will be a force and will continue to exist no matter how the cryptocurrency fund space evolves." "He added.

Whether the U.S. market will have access to a Bitcoin ETF in 2021, however, remains a mystery in itself. The Financial Times reported earlier this week that most ETF applications have been put on hold as US Securities and Exchange Commission Chairman Gary Gensler reiterated concerns about investor protection in cryptocurrency markets.

"I honestly expect all of our filings to be delayed," said Laura Morrison, head of global listings at the CBOE.