Biggest Crypto Fund’s 40% Premium Evaporates During Meltdown
A bitcoin token, left, a litecoin token, centre, and an ethereum token, sit in this arranged photograph in Danbury, U.K. (Photographer: Chris Ratcliffe/Bloomberg)

Biggest Crypto Fund’s 40% Premium Evaporates During Meltdown

The biggest Bitcoin fund’s hefty markup is collapsing amid concern investors are racing for the exit amid the cryptocurrency’s plunge this week.

The $22 billion Grayscale Bitcoin Trust (ticker GBTC) dropped over 15% this week, outpacing Bitcoin’s weekly losses of 11%. As a result, GBTC’s premium to its underlying holdings -- which swelled to 40% in December as the cryptocurrency surged -- has dropped to just 2.8%, the lowest since March 2017, according to data compiled by Bloomberg.

The magnitude of GBTC’s drop and its eroding premium suggest that investors are dumping their positions, according to WallachBeth Capital’s Mohit Bajaj.

“When there is a big move to the downside, bids tend to drop and that premium ends up collapsing because investors are trying to get out of positions,” said Bajaj, WallachBeth’s director of ETFs. “Because of this, the arb band tightens because arbitragers are selling their hedge faster than they can unload the GBTC they are buying back in the marketplace.”

Biggest Crypto Fund’s 40% Premium Evaporates During Meltdown

Seres Lu, an outside spokesperson for Grayscale Investments, didn’t immediately respond to a request for comment.

Bitcoin climbed to an all-time high of nearly $42,000 earlier this month, building on 2020’s massive gains. However, the digital asset has tumbled this week, stoking worries the pace of its red-hot rally can’t be sustained.

To Nate Geraci, president of investment advisory firm the ETF Store, the premium plunge can be attributed to a combination of Bitcoin’s sharp drawdown happening at the same time that a slew of GBTC shares exited their six-month lockup period.

In addition, said Geraci, the trust is seeing increased competition, including from a new Bitwise product as well as one by Osprey, which charges a lower fee. “Additional competition will likely crimp demand for GBTC, putting downward pressure on any existing premium,” he said, adding that a Bitcoin exchange-traded fund could help solve the issue.

GBTC tends to trade at a premium, given that the trust doesn’t allow for share redemptions and demand has boomed. While such divergences occasionally crop up in ETFs, specialized traders known as authorized participants step in to arbitrage the gap away by creating or redeeming shares of the ETF. No such mechanism exists for GBTC.

The Securities and Exchange Commission has thus far declined to approve a Bitcoin ETF, despite applications repeatedly filed since 2013. But some industry watchers, citing new SEC leadership within the Biden administration, say they’re hopeful one might be approved by the regulator as early as this year.

According to James Pillow, a portfolio manager at Moors & Cabot, GBTC’s extreme premiums may disappear as more crypto-focused investment vehicles enter the market.

“It has had no real competition,” he said. “That supply increase should alleviate the need for extreme premiums, and if a comparable ETF (versus a trust) is actually created, it should eliminate all meaningful premiums or discounts.”

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