A closely tracked ratio in cryptocurrency markets known as the “Grayscale premium” flipped earlier this year to a discount, and it widened this week to a gaping 21%, the most on record, according to Skew.
But for retail traders, or anyone with access to a stock-brokerage account, the growing disparity might present an opportunity to buy bitcoin in the cheap, analysts say.
The Grayscale Bitcoin Trust (GBTC), from the crypto asset manager Grayscale, is the largest U.S. investment vehicle for buying bitcoin (BTC) via a stock exchange. The Grayscale discount represents the difference between the price of the underlying bitcoin assets and the value that’s implied from the price of the trust’s shares. (Grayscale is owned by Digital Currency Group, of which CoinDesk is an independent subsidiary.)
The bet some traders could be making now is that the discount would evaporate if Grayscale receives approval from the U.S. Securities and Exchange Commission (SEC) to convert the trust to an ETF. If that happened, according to one analyst, the shares might quickly climb back toward the price of the underlying bitcoin – allowing traders to recapture the discount as profit while still booking any gains from the cryptocurrency itself.
“Investors looking for long-term passive bitcoin exposure are probably better off buying GBTC over spot bitcoin since you get paid to wait more via the discount than you pay in excess fees,” wrote David Grider, strategist at investment research firm FundStrat, in an email.
In recent years, when GBTC was trading at a premium, the situation looked much different.
Accredited investors (usually big institutional players or wealthy people) could profit from buying into GBTC at the trust’s net asset value (NAV). They were subject to a lockup period of six months, but after that, they could then sell their shares for a profit in the open market – locking in any gains from bitcoin as well as capturing the premium as an extra kicker. The 20%-50% GBTC premium also could offset the risk from any potential declines in bitcoin’s price.
Of course, this “Grayscale trade” wasn’t available to retail traders.
Then in March, as bitcoin’s 2021 rally stalled and more competition arrived from bitcoin exchange-traded funds in Canada, Switzerland and elsewhere, GBTC began trading at a discount to NAV, which disincentivized new institutional buyers. Another deterrent was the 2% annual fee.
“Much of the discount has been the result of investors expecting a U.S. listed bitcoin ETF in the near future after the approval of several in Canada,” wrote Grider.
Grider’s view assumes Grayscale is successful in converting the trust into an ETF, which is far from assured. There’s a risk that the SEC might approve no bitcoin ETFs at all, or that Grayscale’s proposal might not win the green light as fast as competing investment vehicles.
But now that Grayscale is “100% committed to converting GBTC into an ETF,” market confidence could return and potentially unlock roughly $5 billion worth of GBTC shares in the coming months, according to Grider.
These unlocked GBTC shares will be available to retail traders at a discount.
“Investors who own GBTC could see their shares converge towards NAV,” wrote Grayscale in an email.
Another short-term or medium-term risk is that the GBTC discount widens from current levels.
“For traders, I wouldn’t be surprised if the gap widens over the next few weeks as a big chunk of new supply comes to the market, but the overhang should start to clear up heading into Q3,” wrote Grider.
Digital Currency Group (DCG), the parent company of both Grayscale and CoinDesk authorized the purchase of up to $750 million worth of shares of GBTC on May 3.
Repurchasing shares is a common tool used by companies seeking to increase the price of those shares by simultaneously creating demand while decreasing the number of shares outstanding.
A representative for Grayscale and DCG declined to comment.