Grayscale Offers A Lot More Than Bitcoin
With the approval of a spot bitcoin ETF in the U.S. becoming increasingly likely after digital asset manager Grayscale won a massive court victory over the Securities and Exchange Commission, investors are debating whether the time is right to purchase GBTC, shares of the firm’s closed-end bitcoin trust, which it wants to become an exchange-traded fund. These shares, which trade at an 18.94% discount to net asset value, could represent an intriguing short-term buying opportunity if GBTC is allowed to turn into an ETF (which removes the discount) in a few months.
However, GBTC is not the only product offered by Grayscale that is trading far away from NAV. The firm offers similar trusts that provide exposure to assets such as ether, ether classic, zcash, horizen etc, that are trading at ranges from premiums above 600% to discounts as large as 47%, which could be interesting to investors.
Key Background
GBTC, launched in 2013, is the world’s oldest and most popular digital asset investment vehicle with $16.2 billion worth of bitcoin under custody.
Grayscale offers 14 single asset trusts plus three diversified products, which means that only accredited investors and institutions can create shares with the firm. After a period of six months for products such as GBTC and ETHE, and 12 months for others, shareholders can sell their assets on OTC markets to anyone.
GBTC traded at a premium above 100% years ago and stayed at 30% from the period between 2019-2021. However, it flipped to a discount in early 2021, shortly after the first bitcoin spot ETF was approved in Canada, providing more advantageous fees and price tracking than GBTC. Since then, competing ETFs have been launched in Australia and Europe, making GBTC’s construct seem antiquated and restrictive.
After the announcement of Grayscale’s recent lawsuit win against the SEC’s ETF decision, the discount on the GBTC exchange traded product narrowed from 29% to 17%, a sign of optimism from markets that the ETF is one step closer to approval.
Outlook and Implications
The outlook for these products depends on a few items, starting with the current stage of the market cycle and a historical assessment of how well each trust has correlated with the spot market of the underlying asset. The record is mixed, with Grayscale products having much higher volatility (beta) with their underlying assets, even if directionally they move in similar directions, as depicted on selected charts provided by Grayscale’s website.
There are other a-cyclical factors to consider, such as regulatory clampdowns. The Financial Times reported in July that the SEC asked Coinbase to halt trading in all cryptocurrencies other than bitcoin prior to suing the exchange. Such steps could depress demand for these tokens, and every asset listed at Grayscale is available for trading with Coinbase. The exchange is fighting the SEC, but other firms such as Robinhood have started to delist assets, including Solana, which is offered by Grayscale. Congress also is trying to create comprehensive legislation to provide regulatory clarity, but the short-term outlook is unclear.
Finally, any additional price movement for a trust with its underlying asset could depend on the likelihood that Grayscale will be able to convert it to an ETF. ETHE seems to be the only near-term candidate right now, as applications are currently pending before the SEC from other issuers for spot and futures ETFs. In fact, Grayscale just applied for permission to trade a second ETF based on futures, this time based on the Securities Act of 1933, which is primarily used to authorize commodities based products to complement an application filed under the more common Investment Company Act of 1940. While this progression may not last forever, the fact that no other assets even have pending applications before the SEC suggests that it will take a long time for virtually every other Grayscale trust will take multiple years to return to NAV.
Decision Points
Investors should use caution in trying to take advantage of Grayscale premiums or discounts over the short term given the regulatory uncertainty. This is particularly true to trusts with high premiums that trade on relatively thin liquidity. Be particularly cautious of Filecoin and Solana’s trusts. As you can see in the first chart, their AUMs are $300,000 and $2.1 million respectively. GBTC has $16.2 billion under management, making it much more liquid.
Furthermore, the Filecoin product’s performance has a low correlation with the underlying asset and trades less than 2,000 shares per day. In other words, the fact that these trusts are so illiquid explains why they trade at nosebleed premiums.
In addition, Solana and XLM have been on wild rides recently. XLM surged on the back of it being a close substitute to XRP, the native token of the Ripple protocol that received a favorable judgment over the summer from a federal judge in its suit against the SEC. Solana has been resurgent this year following a collapse at the end of 2022 due to its close affiliation with Sam Bankman-Fried. Both could be candidates to revert back to the mean.
Regarding assets that trade at discounts, it is important to note that unlike holding assets directly, Grayscale shares are not able to provide yield through decentralized finance protocols or staking activities that can cut into the potential benefit of the discount.
Finally, ETHC is an asset to be particularly cautious about given its anemic level of activity compared to Ethereum. It is also important to note that Grayscale’s parent company, Digital Currency Group, is a strong backer of Ethereum Classic. In fact it owns 20% of the shares in ETHC, which is one of Grayscale’s largest products with $175 million in AUM. Given the company’s financial troubles due to the bankruptcy of its lending arm Genesis Global Trading, there could be added downside pressure to any Grayscale shares owned by DCG, including GBTC.
If you invest in any of these tokens, purchases should be made with the expectation of holding them for years for the discount to pay off. Of course, in that situation you will also have to take into account the potential for further regulatory clampdowns, foreign ETF competition, and future underperformance when compared to bitcoin as a benchmark measure.