The Daily Dive #136 - GBTC Discount Hits Record Low

GBTC Discount Hits Record Low 

Shares of the Grayscale Bitcoin Trust hit record lows today against its net asset value, trading at a 26.5% discount. Amazingly, shares of GBTC are trading below their 2017 high. 

Dylan LeClair 🟠 @DylanLeClair_

If you bought and held $GBTC at the top of 2017 with $BTC trading at 20k, your returns would be -25% today despite $BTC appreciating +110%. Shares of $GBTC are now trading at a 26% discount to net asset value.

To understand how GBTC affects the bitcoin market, you first must understand the structure of the production. Having first started in 2013, the Grayscale product allowed accredited investors and institutions to buy bitcoin exposure by accepting dollars or bitcoin for shares of GBTC at net asset value, with a 6-month lock-up period. 

If shares of GBTC were trading at a premium to net asset value, investors were incentivized to buy more shares of GBTC from Grayscale to capture the arbitrage. This was a large driver in the 2021 bull market, with Grayscale purchasing hundreds of thousands of bitcoin on behalf of investors. 

However, once the product and its previous premium to net asset value turned into a discount, investors were stuck with a product that was no longer redeemable for bitcoin itself, which carries a 2% annual fee and can only be traded over the counter. This also happens to have been when all inflows into the trust abruptly halted, as no investor invests $100 willingly knowing what they receive in return is less, with a lock-up period. 

Now with the product trading 26.5% below NAV, institutional investors could look to sell their BTC for shares of GBTC especially if they are able to harvest a capital loss on their BTC purchase. With the current discount, it is akin to buying bitcoin for approximately $30,000. 

This presents a great opportunity for those who have capital in traditional brokerage or retirement accounts, as the upside on bitcoin itself if the discount closes is close to 26% as James Seyffart noted. 

James Seyffart @JSeyff

$GBTC is still trading at a massive discount around ~26.3%. Many think this means a 26% return if the fund converts to an ETF but the return is actually much bigger. Eliminating a 26.5% discount would be analogous to a security appreciating to $100 from $73.50 -- a 36% return.

With a majority of the trust holdings being purchased over the last two years as bitcoin was embraced by macro investors around the globe, many of these traders are risking off across their “tech” allocations, which bitcoin is often included in. 

In the meantime, as this discount stays wide, it could siphon some of the demand from bitcoin, the native asset itself.