- Institutional investors’ account for 71 percent of Grayscale Investment’s inflow
- The premium on Grayscale’s crypto products is investors paying to not custody their own private keys but still getting exposure to the underlying asset
- The premium could also be because of the Greenscale's lock-up period putting “structural limits to arbitrage”
Digital Currency Group subsidiary Grayscale Investment’s crypto products are trading at extreme premiums. At the time of reporting, the premium on Grayscale's Bitcoin Trust (GBTC) spiked by over 17%.
The premium went down to 24% this week. Currently, Grayscale Bitcoin Trust investors are paying over $10.50 for the underlying asset worth $9.85.
In comparison to Ethereum (ETH), the premium on Bitcoin shares appear mild. Investors in Grayscale Ethereum Trust Fund (ETHE) are paying a premium as high as 426% to the NAV.
Earlier this week, investors were paying as much as $112 for the underlying assets worth only $21.29.
Each share of Grayscale Ethereum Trust represents 0.09485996 ETH.
This demand for Ethereum is from the institutional investors’ side, as 71 percent of the company’s inflow comes from this group.
During an interview from Late February, Managing Director – Michael Sonnenshein had this to say of the increased demand:
“We saw record-breaking investment into Grayscale’s family of products, illustrating continued demand from investors for digital currency access products and with a majority of investment coming from institutions, it’s clear that we’re experiencing institutional adoption.”
Last year, Ryan Alfred, the President of Digital Assets Data, said Wall Street investors are accustomed to custodians holding their assets for them and the premium represents just that: “the amount you’re willing to pay to not custody your own private key, and still get exposure to the underlying.”
Increasing demand from institutions could be the reason behind this surge in price far above the NAV but that's not all.
Arcane Research explains that Grayscale products are structured with a lock-up period, which would explain why markets aren't clearing here, due to “structural limits to arbitrage.”
“A minimum one year holding period will apply to all Shares purchased from the Trust,” according to Grayscale’s annual report from Dec. 2018.
However, this doesn’t mean that markets are inefficient, but it could be that these premiums haven’t been removed for specific reasons. It would be interesting to see how these prices would react when a large number of funds are cleared from their lockup period.