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It has been said that institutional investments have been a primary driver of the Bitcoin bull market and it’s easy to see why. Purchases by MicroStrategy and Michael Saylor have regularly brought euphoria to both fans and markets within crypto and MicroStrategy is now one of the largest Bitcoin whales in the world. Tesla’s purchase of $1.5 billion U.S. dollars worth of Bitcoin back in February was one of the main catalysts for Bitcoin’s run-up in price from around $42,000 to nearly $65,000 over the following two months. And a number of name brand companies like Square, PayPal, Visa, and more have either expanded upon existing Bitcoin and Cryptocurrency offerings or have launched new services altogether.
However, one of the largest proxies for institutional investment and sentiment throughout it all, at least until the recent launch of several ETFs in Canada and elsewhere, has been Grayscale’s Bitcoin Trust (GBTC). The Trust, open solely to accredited investors and institutions for initial investments and deposits, saw nearly 800% growth in assets under management (AUM) during the bull run, growing from around $5 billion U.S. dollars in October 2020 to almost $40 billion U.S dollars in April 2021. However, the lull in Bitcoin’s bull market has been detrimental to Grayscale and there’s concern that Grayscale’s long-term prospects may pose a short-term threat to Bitcoin’s price performance, especially as it relates to the the unlocking of GBTC shares that will occur in the marketplace over the coming weeks.
Grayscale: A Behemoth in the Crypto World
First, a bit of history behind Grayscale and the Grayscale Bitcoin Trust, its premier product. Grayscale Investments was founded in 2013 by Barry Silbert and quickly made a name for itself in the world of cryptocurrency investing. In fact, Grayscale’s crypto footprint is so large that it is commonly referred to as the world’s largest manager for digital currency in the media and elsewhere. In 2015, Grayscale’s founder, Barry Silbert, launched his own venture capital firm, Digital Currency Group, which is now the parent company for Grayscale Investments, along with Coindesk, a premier news media outlet in the crypto space, and Genesis Trading, a digital currency brokerage firm.
Grayscale Investments currently operates fourteen investment funds, of which the Bitcoin Trust is by far the largest. The Trust was originally launched in September 2013 and provides a unique way for investors to gain exposure to Bitcoin and its marketplace. Investors have two primary methods to participate in GBTC. The first entails purchasing Bitcoin with the intent of transferring it into Grayscale’s holdings in exchange for GBTC shares which can be traded on over-the-counter (OTC) markets after an initial six-month lockup period. The second is perhaps preferable for those who wish to participate in Bitcoin investing without actually holding the asset and consists of purchasing the GBTC shares that others sell on the aforementioned OTC desks.
Grayscale’s long-term goal for the Trust is that the value of GBTC shares be an accurate proxy for the value of the underlying Bitcoin themselves. However, Grayscale’s own fact sheet describing the Trust admits that the goal has been hard to attain:
To date, GBTC has not met its investment objective and the Shares quoted on OTCQX have not reflected the value of Bitcoin held by GBTC, less GBTC’s expenses and other liabilities, but have instead traded at a premium or discount to such value, which at times has been substantial.
The reason that GBTC commonly trades at a premium or discount usually comes down to two factors:
GBTC had for years been one of the only ways for institutional investors, who have strict investing requirements as established by regulators, to gain exposure to Bitcoin. As a result, periods of significant demand from institutional investors have driven GBTC price increases even faster than those of Bitcoin itself, meaning that GBTC shares have often traded at a large premium to spot market prices, sometimes 100% or more.
Grayscale does not allow for redemptions of the underlying Bitcoin holdings against the GBTC shares themselves. Since the Bitcoin are essentially locked in the Trust indefinitely, market participants are unable to perform price arbitrage during periods of low demand for GBTC, which would entail redeeming the GBTC shares for the discounted Bitcoin holdings and then selling them at higher prices on the spot market.
While the Trust’s Bitcoin holdings can’t be unlocked and traded on the open market, the GBTC shares see significant trading volume after exiting the initial six-month lockup period mentioned previously. In fact, the forthcoming unlock for a large number of GBTC shares has raised concerns from many inside and outside cryptocurrency markets that another bearish performance from Bitcoin’s price may be on the horizon. But what will the true impact of the GBTC unlock be?
GBTC: The Bullish and Bearish Case
The relevant Bitcoin holdings were locked up in January and February of this year, and include tens of thousands of Bitcoin that were placed with Grayscale during one of the hotter periods for the Bitcoin bull market. There are two main arguments for whether the unlock will be bullish or bearish for Bitcoin:
Bullish
During periods in the past where GBTC shares were trading at a significant premium to Bitcoin spot market prices, it was common practice for accredited investors to borrow rather than buy Bitcoin in order to place them with Grayscale, a strategy known as the “carry trade”. After all, significant money can be made if you borrow Bitcoin at a 15-20% annual rate and then make 100% returns six-months later. These investors provide a lot of demand to borrow Bitcoin from cryptobanks like BlockFi and Nexo Finance and help drive the returns that those companies pay to their depositors, which commonly range between 4-8%.
The depositors will likely want to withdraw their Bitcoin from the cryptobanks at some point though. And because Bitcoin holdings cannot be withdrawn from the Grayscale Bitcoin Trust, investors who participate in the carry trade are required at a certain point to purchase physical Bitcoin on the spot market with which to pay back cryptobanks and their depositors. If a large portion of the upcoming GBTC unlock consists of borrowed Bitcoin that need to be repaid, it could provide a large amount of demand on Bitcoin’s spot markets, which would be bullish for the cryptocurrency’s price performance, at least in the short run.
Bearish
The GBTC unlock also represents a large increase in GBTC shares available for trading on the OTC markets. Increased supply without a commensurate increase in demand has the natural effect of decreasing the market price of GBTC shares. They are already trading at a discount to the spot price of Bitcoin thanks to the pause in its bull run, and further selling pressure associated with the unlock could drive down GBTC’s price further in relation to Bitcoin. The result of lower prices, of course, is that increased demand may come onto the market. If that is the case, many institutional investors could decide to pay to buy GBTC at a discount rather than buying physical Bitcoin on the spot market, which would be bearish for Bitcoin.
So is it Bullish or Bearish?
It’s likely that both the bullish and bearish cases described above will come to fruition to some degree. However, it may be more appropriate to discuss the probable timing for each development:
Since the GBTC premium has turned into a discount over the past six months since the initial lockup, investors who initiated the carry trade at that time are possibly losing money by having to continue paying interest to borrow Bitcoin from cryptobanks and depositors. The investors may be incentivized as a result to buy Bitcoin on the spot markets as soon as possible with which to square off the loans. This would provide a boost to Bitcoin spot market prices in the near term.
Since GBTC shares are currently trading at a discount, selling the shares rather than continuing to hold them may cause the investors to have to recognize significant losses on the investments. It may be then that the investors wait to sell off the shares in the hopes that GBTC’s prospects will reverse and that the shares will once again trade at a premium. This means that any bearish impact from the GBTC unlock may come over time rather than all at once.
Only time will tell whether the overall impact from the unlocking of GBTC shares this month and next will be bullish or bearish. Either way, we all should be doing our own research on this and other Bitcoin catalysts as we determine whether we should invest in Bitcoin and, if yes, how.
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