Ever since the coronavirus pandemic began, bitcoin has been on a rollercoaster ride. While the BTC price has been trying to push higher, in May, miner rewards were cut into half to 6.25 BTC.
After miner inflow was reduced by 50%, there have been reports of Grayscale’s GBTC Bitcoin Trust buying the digital currency at record pace.
Currently, GBTC shares are trading at a premium of 20% to Bitcoin with each share cost $10.76 where each share represents 0.00096070 BTC which means one BTC is worth $11,200 here while Bitcoin is trading on spot exchanges just under $9,400.
Grayscale’s Ethereum product ETHE is trading even at a higher premium of 750%, 46% above ETH's ATH.
A FINRA-approved investment vehicle, Grayscale held more than 300,000 BTC prior to the March 12 crash. Recently, it was revealed, the crypto hedge fund Three Arrows Capital has become the qualified investor to hold more than 6% of Grayscale Bitcoin Trust (GBTC) shares.
The fund has amassed more than 21 million GBTC shares, worth nearly $259 million or just over 20,230 BTC.
Retail Investors getting Ripped Off
Since halving, Grayscale has been gobbling up 50% more BTC than has been created. The news excited the crypto market given that bitcoin supply in the market has already cut down and with Grayscale consuming all the Bitcoin that is being created in the market and more, this should drive the prices up.
But that’s not really the case!
According to Ryan Watkins of Messari Crypto, Grayscale actually bought way less, just 31% of all new bitcoin mined since the halving.
This is because of the in-kind purchases. “~80% of the money it reportedly pulls in do not make up for any buy pressure,” because they were ‘in-kind’ purchases. Basically, these institutional investors can hand out their own BTC in order to ‘buy' the GBTC shares.
GBTC shares are available to accredited investors and are created using cash or cryptocurrency with a year lock-up period, to be reduced to 6-month, which means initial investors can sell their shares to the public on secondary markets after the period is over. Watkins explained,
“When there are a lot of buyers and few sellers, investors in the secondary market can push the price of the shares well above the value of the underlying cryptocurrencies.”
“Since no new shares are being created, no new cryptocurrency is actually going into the trust, creating a premium to the underlying. This can create a significant arbitrage opportunity for accredited investors who can create new shares in the primary market.”
21shares, previously known as Amun, also shared in its report that buying bitcoin at these premiums makes sense if one is an institutional investor and creates shares at NAV but retail investors are simply getting “ripped off.”
Given these high premiums on products, it is unlikely that savvy or institutional investors are buying them. It’s the retail investors that are buying GBTC shares to get exposure to Bitcoin through their brokerage accounts or 401Ks.
It’s the “institutional and accredited investors that create GBTC are able to resell at large markups” and of course, Grayscale is benefitting from retail overpaying, said Lanre Ige of 21shares.