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Why is GBTC seeing the biggest negative premium in history?

2022 has been extremely fascinating when it comes to cryptocurrencies. Many events that have never happened before, have exactly happened. Some of them include collapses of dominant cryptocurrency exchanges, providers of lending and borrowing services or different funds.

This led not only to panic behaviour and change of market sentiment, but also to a drawback of prices of the cryptocurrencies. All major cryptocurrencies are down by more than 70% – 80%, with some seeing even more horrific numbers. However, different financial products connected to cryptocurrencies are also suffering, with GBTC being the prime example.

What is Grayscale and GBTC?

Grayscale Investment is one of the biggest and most important companies in the cryptocurrency world. Currently it has around $10.5 billion in assets under management (AUM) only in its biggest product, the GBTC, which will be looked at in-depth in the following paragraphs. Created in mid-2013, it is also one of the longest running cryptocurrency companies that offer services such as buying, hodling and selling derivatives of cryptocurrencies for their clients.

At the moment, Grayscale Investment offers 14 different trusts. It has its own funds and trusts for such cryptocurrencies as Ethereum (ETH), Chainlink (LINK), Solana (SOL) or Bitcoin Cash (BCH), while also providing trusts for cryptocurrencies such as Livepeer (LPT), Zcash (ZEC) or Horizen (ZEN).

However, the most important product as well as the one that is the most talked about currently is the GBTC. This is due to a huge disparity that has been currently ongoing between the spot price of Bitcoin and the GBTC itself. Why is it happening?

The biggest discount GBTC has ever seen

One of the most popular and probably the best-known product of this company is Grayscale Bitcoin Trust (GBTC). It allows mainly accredited and institutional investors gain exposure to Bitcoin, without the need of holding their own keys or downloading wallet. The only thing they need to do is buy shares of GBTC. Through this, they gain an exposure to Bitcoin price movements.

Grayscale has also for the longest time tried to change this GBTC product to Bitcoin spot ETF (exchange traded fund), however the SEC has so far rejected all of its applications. And currently, it might be visible why. 

The GBTC is trading at the biggest discount (negative premium), to the spot price of Bitcoin that this product has ever seen. And this is even considering the fact that Bitcoin itself has had a pretty terrible year when it comes to price. Bitcoin is down more than 72% YTD and more than 78% from its ATH (all time high) in November 2021. However, GBTC is currently down more than 88% from its ATH in February 2021. Yet, the biggest price disparity can be seen once we look at the premium of GBTC.

On 17th of November, the discount was as low as 45.08% to the spot price of Bitcoin, the all-time low. While it has jumped back up a bit, to about 39%, the negative premium between the prices of the two products is still vastly higher, than at any previous point in history.

Discount of GBTC to spot Bitcoin price, Source: ycharts.com

Historically, GBTC used to trade above the NAV (Native Asset Value), in this case the spot Bitcoin price. The highest premium it has ever reached was at the end of 2017, when the premium was more than 130%. However, the times have changed and at the beginning of the year 2021, the premium of GBTC became a discount. This means that the price of GBTC representing the same amount of BTC as its NAV, was no longer trading higher than the spot price of Bitcoin.

5-year history of GBTC discount:premium, Source: ycharts.com

Ever since this flip happened, the GBTC was not able to come back to parity or reach the premium territory. On the other hand, the negative premium, known as discount, that is currently seen has never been reached before. With as low as 45 %, the discount to NAV is so huge that many question the solvency of Grayscale Bitcoin Trust and Grayscale Investments itself.

Yet, these questions are connected also to the current mood in the market. To the mood, that has actually caused this kind of discount. And since this is crucial to the understanding of why the GBTC is so low, let’s look at the three main points that might have caused it.

Three reasons for ATL of GBTC premium

While one can only assume why the GBTC discount is currently seen in the market, here are three reasons that might have helped push it so low.

1. From Luna to FTX – investors are worried

The current market sentiment is far from optimistic. The reality seems to be hitting hard and many investors are left worried after all the crashes that the cryptocurrency world has seen this year. From Luna, through Celsius Network to FTX, a huge number of sizable players have either already gone bankrupt or are close to it.

This obviously shades a light on companies such as Grayscale Investment, with their GBTC shares being in the front line of worry. While many investors have asked about the solvency of Grayscale Investments, especially after the FTX crash, the company has left them with nothing but trust, since they decided not to provide proof of reserves.

2. Decline to publish proof of reserves

And that is another problem that has sent GBTC lower. The fact that the company has decided not to disclose their wallets and how many coins they actually hold, left a substantial number of investors worried. Different exchanges around the world had no problems with proof of reserves, through which they tried to calm their investors down and regain their trust.

However, Grayscale has decided to go in another direction. Due to “security concerns” the company decided not to disclose their current numbers, holdings and wallets. While Coinbase, the company that is in charge of custody of bitcoins that are placed in the GBTC, came out and said that everything is in order, they also did not provide concrete wallets.

This only means that the customers and investors of Grayscale need to trust the company that it does what it claims to. While no one is saying that they are not doing it, trusting someone is not one of the key characteristics of cryptocurrencies, which are mostly based around individual verification rather than blind following. Thus, the lack of interest or ability to show the reserves was interpreted as a red flag by the crypto public.

Proof-of-Reserves (PoR): What, how and why it matters

Source: Shard Labs

3. Genesis Trading and DCG solvency problems

However, what seems to be the biggest reason for the current push downward in the discount of GBTC is its connection to two companies, which are allegedly in trouble. The first one is Genesis Trading, which is deep in trouble. It has already halted payouts and is said to be close to a bankruptcy.

The solvency of Genesis Trading might be in the hands of Digital Currency Group (DCG) since it is said to owe about a billion dollars to Genesis, as it is its global parent company. Currently, DCG is trying to raise about $1 billion, which is probably to cover the debt.

However, as of now it seems that if DCG runs into problems, so does Genesis Trading. And if one of them goes bankrupt, it will probably drag the other with it due to their incredible ties. The ties, however, go as far as Grayscale Investment, which is why investors are starting to worry even more. The failure of these companies to become solvent can drag Grayscale and thus GBTC and its discount down.

That is why people are trying to calm the current mood. Manas Agrawal and Gautam Chhugani from Bernstein have said the following:

“GBTC’S trust structure protects its holders and remains ring-fenced from failures within DCG or Genesis group entities.”

DCG, just like Coinbase, is trying to assure investors that they are safe by stating that Genesis is not a service provider “for any” Grayscale product. While the reassurances are coming left and right, the reality seems to be more unclear than it should be, which is why many investors are left wondering what will happen next.

Conclusion

While the GBTC discount has recovered a bit, it is still significantly below its average as well as the price of spot Bitcoin. This is mostly due to concerns with the solvency of companies that have close ties to Grayscale and their bankruptcy could endanger the whole company. Unless this, or the sentiment changes significantly, the GBTC negative premium has no reason to start moving much higher.

 

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