Grayscale Bitcoin Trust
(OTC: GBTC) is a publicly traded investment trust that only holds one asset, bitcoin. It is the oldest and largest listed investment vehicle in the sector, holding U.s.a.$10.2 billion in assets and generating United states$200 million in annual fees.
Having for many years traded at a premium, the trust currently trades at an all-time broad 45% disbelieve to the internet nugget value (NAV). Essentially, purchasing units in the trust gives you a 45% discount compared to buying bitcoin straight. While information technology’s not unusual for a listed trust to trade at a discount to net assets, it is very unusual when the investment is and so highly liquid.
Nevertheless, given the recent bankruptcies in the sector, investors are nervous that the disbelieve may continue to widen, or that the bitcoin assets are not even there at all.
Should y’all seize the opportunity and hold on for a potential 100% proceeds? Or is Grayscale the next crypto visitor to fall and cost investors billions?
GBTC has been around since 2013. Internet assets peaked at Us$39.8bn in October 2021. At the time, GBTC had always traded at a premium to net nugget value as investors preferred the exposure through their traditional brokerage account rather than ownership bitcoin through a cryptocurrency exchange.
Subsequently the first bitcoin ETFs were approved in Canada later that yr, with fees less than half the two% charged by GBTC, it began to see outflows. Then as sentiment towards bitcoin and digital assets turned from euphoria to misery over 2022, GBTC besides saw a reversal of the premium to a very meaning disbelieve.
The investment manager of GBTC, Grayscale Investments, is owned by Digital Currency Group (DCG), which too holds a large portfolio of other investments in the space.
DCG was recently valued at The states$ten billion. They’ve long been lauded every bit a leader in the sector, in item for their success with Grayscale, the crown precious stone of the empire.
1 of their principal subsidiaries is Genesis Trading, perhaps the number one prime banker in the entire sector. Genesis was embroiled in the Three Arrows Capital situation in June this year and more recently it was revealed they had stranded avails on complanate exchange FTX. Equally a outcome, Genesis suspended withdrawals from their products and have been trying to raise up to Us$one billion in the meantime.
Facts or FUD?
There is a genuine possibility that Genesis Trading now files for bankruptcy. In doing so, speculation volition accident back on the parent company DCG and therefore, the other subsidiaries, including Grayscale Investments.
Although GBTC’south pregnant discount to NAV emerged in early 2021, the current 45% level suggests distress and even doubts about the underlying collateral.
Further, Grayscale has refused to provide on-chain proof of their bitcoin holdings, due to “security concerns”, despite one of their competitors doing so. Their custodian, the Coinbase Custody Trust Company (CCTC), has written a public letter of the alphabet to reassure their prophylactic custody of the GBTC avails. Still, the high profile collapses in crypto this year; 3AC, Luna, Voyager, and FTX, all happened within days of like reassurances.
Fortunately, a twitter sleuth has accounted for the assets using on-chain forensics, which suggests a very high probability that the stated avails are there.
Excavation in further
We looked at the corporate and legal structures behind GBTC, to get an understanding of whether any of the assets in the Trust are at take a chance in the effect of serious trouble at DCG.
The iii most important third parties here:
- Authorised Participant(due south)
Grayscale Investments is appointed as the “Sponsor”.
Coinbase Custody Trust Company (CCTC) is appointed as the “Custodian”.
Grayscale Securities is the sole current Authorised Participant.
The movement and safeguarding of avails in and out of the Trust are done by the in a higher place third parties, not unitholders. However, unitholders of GBTC own beneficial partial interests in the Trust itself. Therefore, the legal ownership of the underlying assets does reside with unitholders, non the other parties above.
The Sponsor (Grayscale Investments) is tasked with marketing GBTC, publishing fiscal reports, selecting the Custodian, and processing orders to create shares. They don’t hold or transfer any bitcoin other than its fees.
The custodian (CCTC) has the most of import role in safeguarding the Trust’s Bitcoin assets. It’s worth noting hither that CCTC is part of an SEC registered listed company. While they are much maligned in many quarters, they have passed the highest regulatory hurdles of anyone in the sector.
CCTC provides their wallet addresses to receive bitcoin from Grayscale. Then the private keys to those addresses are held in common cold storage by CCTC.
Dissimilar FTX, Grayscale, DCG and Coinbase are domiciled in the United states, which should give investors some confidence in the legal rights of the end customers.
Custody is key
CCTC is not immune to co-mingle the Trust’s bitcoin assets with parent company Coinbase’s assets. In addition, CCTC must not go on more than United states of america$100 million of bitcoin in any one wallet.
Critically, Grayscale cannot easily raid Trust assets, nor loan or leverage against them.
CCTC as Custodian is also liable for losses of Trust assets due to theft. CCTC maintains roughly $320 million of insurance coverage as of Dec 2021, much less than the United states of america$10.2 billion of avails in the Trust. However, with every prepare of individual keys held separately, and every wallet holding less than $100m, the insurance coverage is not one of the biggest issues.
Worth the risks?
While we tin rule out the worst-case scenario where GBTC assets practice not exist or are not safely custodied, there are other major risks we’d be worried about:
- Deeper NAV discount
- Custodian replacement
- Value drain by the Sponsor
- Sponsor replacement
Sentiment towards Grayscale and DCG could worsen, as could sentiment towards bitcoin and the wider crypto sector. Further, DCG itself owns 4% of GBTC units at the parent company, which could be sold into the open market causing the discount to widen.
Replacement of Coinbase equally the custodian could cast farther doubts on the Trust, and would exist a major red flag. In general, people have more confidence in US-based custodians than those offshore.
Mayhap the most overlooked adventure is the i hiding in plain sight. The Trust could comport on for a few years, with poor sentiment leaving it trading at a disbelieve. Unitholders would be stuck paying the 2% management fee
on the value of the bitcoin, slowly ‘haemorrhage out’ over time.
The Sponsor could be replaced through a sale of (the very profitable) Grayscale past DCG, if necessary. DCG would only do this if information technology needed to assume some rather big liabilities from Genesis. They would be giving up a $200m annuity and it’s highly unlikely they would exercise then without trying everything they can to maintain that. Otherwise, the Sponsor could be changed in case of DCG bankruptcy.
The stated intention of Grayscale is to convert the trust to an ETF, which would immediately close the NAV gap. The chances of that happening seem slight, having had over a decade of Bitcoin ETF rejections in the US. Nevertheless, Grayscale has upped the ante significantly and is suing the SEC afterward their about recent rejection. The timeline for that action is set up out beneath and the instance will probable be heard in 2023.
Perchance the risks seem overblown on this one? The existent risks are really to the nugget prices in the fund and if you are willing to accept those risks correct now when almost nobody else is, y’all might as well practise then with a 45% discount.
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