In March it starts again? – The adventures of the GBTC never end. As we informed you a few days ago that Digital Currency Group was to buy cryptocurrencies from its subsidiary Grayscale. We learned today that institutions are persisting in buying GBTC even though its discount has reached 30% of its real value. Could this be the harbinger that a Bitcoin ETF is going to be validated by the SEC? Not sure…
Purchases reaching record highs
Since December 2021, it has been noticed that during certain weekly sessions, investors have gone so far as to invest between 10 and 120 million dollars in the Trust Grayscale’s flagship: the GBTC.
As a reminder, the GBTC is somewhat based on the same principle as corporate actions. You have a limited number of units available in the GBTC Trust, each representing 0.00092779 BTC. So the more you buy the more shares of the trust you get. Institutions who wish to expose themselves to bitcoin, while respecting the regulation imposed by the SEC, can therefore expose themselves to it by going through this type of product. However, a minimum investment of $50,000 is required to access the trust.
The GBTC, unlike bitcoin which never stops, stops trading on Friday evening. However, at the close of February 25, the day after Ukraine invaded Russia, an investment peak of $140 million was noticed on the Glassnode charts:
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But no sale despite the economic and political context
The markets suffered several consecutive shocks following announcements by the FED, which decided to raise its key rates to moderate inflation in the United States (at its highest in 40 years). Investors therefore wanted to disengage from the technology sector by selling their shares massively. Which had the effect of sending the NASDAQ to the cellar, which saw one of the worst declines since the covid crack of March 2020 (~20%).
Added to this is the war in Ukraine, which has left GBTC investors with double-digit losses (in %).
As an example we take theETF ARK Next Generation Internet run by Cathy Wood which includes GBTC. This has lost almost 45% of its value from one year to the next. But the fall in the price of Bitcoin is not the only explanation for the fall in the value of the ETF.
This drop is also explained by its exposure to sectors, which as we said, suffered a sharp drop (linked to the sale of investors mentioned above). Indeed the technology sector of the ETF has lost ~43.14% of its value and that of communication ~27.99%.
While ARK Invest’s EFT had been in a range for several months. ARKW added 450,000 shares of GBTC in November 2021, while their discount reached almost 17.5%. However, no one could foresee the invasion of Ukraine, which helped to accelerate this haircut.
Ark Invest and Morgan Stanley = Diamond Hand?
ARK invest are not the only ones to find themselves in such a situation. The Morgan Stanley Insight Fund held more than 1.5 million GTBC as of September 30, 2021. That’s more than $66 million, according to its securities filings with the U.S. Securities and Exchange Commission (SEC).
Year over year (March 2021 to March 2022) the Morgan Stanley Insight Fund (CPODX) lost more than 50% of its value at the time of this writing.
ARKW and CPODX have both underperformed, with GBTC falling 43% over the past 12 months. However, neither ARKW nor CPODX said they sold significant shares of GBTC.
There are many factors behind GBTC’s underperformance, including growing competition from exchange-traded funds (ETFs) in Canada, which we told you about last year.
What you need to know is that unlike the GBTC, ETFs allow investors to carry out share buybacks, a process by which a fund can destroy a portion of the stock based on the dynamics of supply and demand. This keeps the price close to its real value.
But the problem is that the GBTC is not an ETF. We mentioned to you a few days ago the purchase of several million dollars of shares of Digital Currency Group from Grayscale. These buybacks can help limit breakage, but unfortunately are not enough, as the GBTC competes with the ProShares Bitcoin Strategy ETF (BITO), which holds futures contracts and therefore continues to drive the price of GBTC away from the SPOT price of Bitcoin.
? Definition : A forward contract constitutes a commitment to buy (for the buyer) or sell (for the seller) an underlying asset at a price fixed today, but for delivery and settlement at a future date. In our case the underlying asset is bitcoin, but it could very well be a financial instrument like a stock.
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Grayscale in the sauce?
It’s partly for this reason that Grayscale is pushing the SEC to accept a bitcoin ETF, because it will allow them to turn GBTC into an ETF and therefore destroy stocks, allowing them to do raise the price of GBTC towards that of the SPOT price of bitcoin.
Nonetheless, the SEC has not approved a single spot Bitcoin ETF application at this time, citing risks related to price manipulation.
By comparison, regulators in Canada have been more welcoming of Bitcoin-backed physical investment products. As was the case for Fidelity Investments Canada’s BTC spot ETF, which was announced in December last year.
Two solutions are available to Grayscale to get out of the rut:
- According to the management company Investor Trip, the SEC will eventually approve a bitcoin Spot ETF if the lobbies press for it. But so far that doesn’t seem to be the case.
- Income Portfolio analysts, on the other hand, were more critical of the product offered by Grayscale, presenting it as a product “destined to go to zero”.
So are Grayscale and its GBTC going to succeed super the premonition of the analysts of Income Portfolio or are they going to get out of this mess saved in extremis by the DRY who will approve at the last minute. Will Grayscale and its GBTC suffer the premonition of analysts from Income Portfolio or will they get out of this mess saved in extremis by the SEC which will approve a SPOT ETF in the United States at the last minute? Nothing is less certain… Case to follow!n ETF SPOT in the United States? Nothing is less certain… Case to follow!
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