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The world’s largest Bitcoin fund, the Grayscale Bitcoin Trust, is up 25% in value since the beginning of the year. Bitcoin, on the other hand, has only risen about 4% over the year.
This means that the underlying bitcoin discount is at its lowest level in months. Just four weeks ago, in December, when the discount rate hit a record high of 50%, I analyzed the discrepancy.
The discount rate is now 37%, returning to pre-FTX’s infamous collapse.
Grayscale is a trust that provides an avenue for investors to gain exposure to Bitcoin without having to physically purchase Bitcoin. This is useful for institutions and other entities that cannot directly participate in the Bitcoin marketplace for regulatory or legal reasons.
However, Grayscale rarely trades at the same price as its net asset value. Previously, it traded at a premium to the underlying bitcoin as its stock price surged by investors desperate for exposure to the rising cryptocurrency.
But today it’s the other way around, with big discounts. There is a hefty 2% fee that partially accounts for the discount, but this is not enough to make up for the 30%+ discounts we have consistently seen this crypto winter.
The SEC recently rejected Grayscale’s application to convert the trust into an exchange-traded fund, spelling bearish behavior about the fund. Competition is also intensifying, especially in Europe with similar funds being launched and Bitcoin ETF applications being filed.
The most significant concern, however, concerned the safety of the reserve. The issue got a leg up after the FTX demise, as speculation grew that Grayscale’s parent company, Digital Currency Group (DCG), may file for bankruptcy.
DCG is also the parent company of Genesis, which recently laid off 30% of its workforce and was reportedly considering bankruptcy. Concerns were heightened when Grayscale refused to release the proof of its reserves report following its nefarious behind-the-scenes actions at FTX.
Although he cited “security concerns” as the reason this was not possible, analysts denounced this, saying that it is very hard to see what security concerns would be raised by the disclosure of public records on the blockchain. unknown
6) Coinbase frequently performs on-chain verification. Due to security concerns, we do not expose such on-chain wallet information and confirmation information through encrypted proof-of-reserve or other advanced cryptographic accounting procedures.
Grayscale (@Grayscale) November 18, 2022
The discount rate is still a hefty 37%, but has shrunk from the staggering 50% reached in the aftermath of the FTX implosion.
There is increasing pressure on the DCG to address this discount, and there are calls from within the industry to allow investors to redeem their holdings through trust so that they can maximize the value of their Bitcoin holdings. There are voices saying it needs to be done. This commotion could have helped narrow the gap somewhat.
One of the hedge funds, Fir Tree, has filed a lawsuit against Grayscale, demanding that it either lower its fees or allow redemptions so that the discount can end.
But like all current cryptocurrencies, macros have a role to play. The year started with rising optimism that inflation may have peaked, pushing crypto prices higher. This follows a month or so of relative calm in the crypto market.
Discounts increased significantly in the aftermath of the FTX crash as people feared contagion and chips were still dropping. Similar to how the pegs on the tether slipped when the UST crisis hit.
Discounts have been reduced now that normal services have resumed for a bit. Unfortunately for investors, that’s still a staggering 37% of net asset value. In a year when Bitcoin itself plummeted, discounting on top of its ferocious price action is the last thing an investor needs…
