ETF is the next goal of Dacai Investment Grayscale?

As the world's largest crypto asset management company and the largest buyer of Bitcoin, Gray's every move has attracted much attention.

On the evening of April 5th, Grayscale published a blog post "Grayscale's Intentions for a Bitcoin ETF", stating that it plans to convert the Bitcoin Trust (GBTC) into a Bitcoin ETF, and the timing of the conversion depends on the regulatory environment.

What will happen when GBTC is converted to Bitcoin ETF? Combined with the continuous negative premium of Grayscale Bitcoin Trust in the past month, what is the relationship between the two? What impact does the negative premium have on the Bitcoin market?

Introduction to Grayscale Products

Grayscale Investment is a subsidiary of the United States Digital Currency Investment Group (DCG) established in 2013. It specializes in the management of encrypted assets trust funds. It mainly provides services for institutional investors and high-net-worth qualified investors through compliant fund operation. .

In simple terms, what Grayscale Trust does is to provide a compliant Bitcoin investment channel, accept investors’ funds, which can be legal currency or cryptocurrency, based on the corresponding share of encrypted assets, and then distribute trust stocks as assets Evidence of equity. When investors no longer want to hold the rights, they can transfer trust stocks through the secondary market.

At present, Grayscale has launched a total of 13 mainstream digital asset trust funds including BTC, ETH, ETC, BCH, FIL, XLM, BAT, LTC, MANA, ZEC, ZEN, LINK, and LPT, as well as a large-cap index fund. Among them, the Grayscale Bitcoin Trust Fund (GBTC) is currently the largest Bitcoin fund in the world. The fund holds approximately 654,421 Bitcoins and has a market value of $38.1 billion.

On September 25, 2013, Grayscale established the first Bitcoin Trust Fund (GBTC) on the market and obtained the private equity exemption registration from the U.S. Securities and Exchange Commission (SEC) that year. In 2015, it was approved by the U.S. Financial Industry Regulatory Agency (FINRA). ) Approval of listing.

GBTC is currently the only investment product that can be traded on the secondary market of US stocks to track the price of bitcoin, and it is also the only product in the US pension plan that can buy bitcoin exposure.

Although currently only GBTC and ETHE are SEC reporting companies, Grayscale uses the same business model for all existing products (as shown below): initiate private placement, obtain public quotations in the secondary market, become a SEC reporting company, and convert to ETF.

At present, different gray-scale products are in different stages of their life cycle (as shown in the figure below), and their purpose has always been to convert these products into ETFs when conditions permit.

As of April 5, 2021, Grayscale's total asset management scale reached 46.1 billion U.S. dollars, an increase of 53.67% compared with 30 billion U.S. dollars at the beginning of the year. This growth momentum shows the increasing interest of institutional investors.

GBTC and Bitcoin ETF

So, why does Grayscale convert Bitcoin trust funds into ETFs? Here we will talk about the current development and premium of Bitcoin ETFs, and what is the difference between GBTC products and ETFs.

At the beginning of 2021, Canada successively passed two Bitcoin ETF funds, which once again aroused the market's attention and heated discussion on ETFs. Among them, the Bitcoin ETF (BTCC) of The Purpose Investments has inflowed 848 million US dollars since mid-February, which is eroding the market share of Grayscale GBTC. In the face of the continuous emergence of competing products, Grayscale seems to be aware of this crisis, and many people in the industry believe that this will put pressure on the US SEC to change its position. As the time matures, Grayscale decides to join the competition. Plans to convert GBTC into Bitcoin ETF.

(Note: Gray initially filed an ETF application in 2016, and had a dialogue with the SEC for most of 2017, but eventually withdrew the application. Because the regulatory environment for digital assets had not yet been developed to successfully push this product To the point of the market.)

As for what will happen when GBTC is converted to ETF?

First of all, for investors, Gray said that shareholders of publicly traded GBTC shares do not need to take any action, and the management fees that need to be paid after converting to a Bitcoin ETF will be reduced accordingly. Secondly, as far as Grayscale itself is concerned, on the one hand, it can alleviate the current severe negative premium, and on the other hand, it can occupy an absolute leading position in the ETF market by virtue of its liquidity. Finally, for the crypto market, more institutional and retail investors and funds poured in through Grayscale, which can support BTC to go further and healthier.

To better understand this, let's talk about the difference between Bitcoin ETF and GBTC.

ETF (Exchange Traded Fund) is a trading open-end index fund, which is an open-end fund with variable fund shares listed and traded on an exchange. The price of ETF funds needs to be strictly anchored to the price of a certain type of index/asset. The Bitcoin ETF, or Bitcoin Exchange Traded Fund, is a fund that tracks the Bitcoin price index.

GBTC is a closed-end fund dedicated to investing in Bitcoin, usually called an investment trust. The number of stocks available for this type of fund is limited, and the price of its share floats freely, and the share may be higher or lower than the bitcoin it represents. When it is higher than the value of the bitcoin it holds, it is called a premium, and when it is lower than the value of the bitcoin, it is called a discount (discount).

The common point of both GBTC and Bitcoin ETF is that they both provide investors with a channel for compliant investment in Bitcoin. They do not need to actually purchase and keep Bitcoin assets, and do not need to bear the risk of key custody, but they can also obtain investment. Bitcoin gains.

The difference between Bitcoin ETF and GBTC is:

1. ETF allows market makers to create and redeem stocks at will. GBTC is not allowed to redeem during its duration. The realization of fund shares must be traded through the secondary market. 2. GBTC has a 6-month lock-up period, and there is usually a premium. ETFs have better liquidity, and there is usually no premium or discount. 3. GBTC transaction fees are high, involving brokerage fees, annual management fees (2%), and premiums. Bitcoin ETF fees are lower, some 1% or even lower (0.4%). 4. GBTC has a high investment threshold and is only open to qualified investors, with a minimum of US$50,000. Bitcoin ETFs have fewer restrictions on investors and investment amounts.

GBTC trading information on OTCQX (over-the-counter market of the US stock exchange)

Compared to Bitcoin ETFs, the advantage of investors choosing GBTC may be that they can avoid capital gains tax. Therefore, in general, the Bitcoin ETF will obviously be more popular because it is more transparent, more liquid, has lower thresholds and redemption risks, and is easier to be accepted by mutual fund managers and pension funds.

The impact of negative premiums

Let's talk about the negative premium of grayscale GBTC.

Since GBTC has no redemption procedure, GBTC holders have no way to convert their shares into Bitcoin, and there is a lock-up time of up to 6 months, and strong buying demand makes the price of GBTC usually generate a significant price with its net asset value. difference. The long-term premium rate of GBTC remains above 15-20%.

GBTC can be purchased in the primary market and traded in the secondary market at the same time. There are two prices generated by this mechanism: real-time net value and real-time market price. GBTC premium refers to the difference between the price of Bitcoin implied by the share cost of GBTC that is publicly traded and the price of Bitcoin traded in the secondary market.

For example: on April 7, the closing price of GBTC stock was US$50.62, while the actual Bitcoin price per share of GBTC was US$55.23 per share. This means that GBTC shares are currently traded at a discounted price equivalent to 91.7% of their net asset value (NAV), which means that GBTC currently has a negative premium of 8.3%.

On February 23, GBTC had a negative premium for the first time in 2015. After nearly a month, GBTC has maintained a negative premium, and even reached a record high of -14.31% on March 24. This has caused some concerns in the market. Some analysts believe that this is a turning point for the market and not a good thing.

There may be two reasons for the continued decline in the premium: 1. GBTC in the primary market is due to be unlocked and released but there is no redemption mechanism. Under the demand for arbitrage, the secondary market sells pressure and causes the premium to fall; 2. Competitive products of the same type such as Canada The launch of multiple Bitcoin ETFs reduced the demand for GBTC.

So what is the impact of negative premiums? Will it directly affect the price of Bitcoin?

The continued negative premium will indeed eliminate the huge arbitrage space of GBTC, and mean that the current transaction price of GBTC is always lower than the value of the underlying assets it holds. This is likely to reduce the institutional demand for GBTC, which directly leads to grayscale contrast. Special currency purchases slowed down.

If the US SEC approves the first Bitcoin ETF, then Grayscale GBTC products may be gradually marginalized. And this is why Grayscale is considering converting GBTC into Bitcoin ETF.

Of course, don’t worry too much about this. The decline in the GBTC premium is due to the fact that trading institutions are honoring the premium, which does not necessarily directly mean that the market is bearish or capital outflows.

Grayscale has already taken some measures to remedy the negative premium. For example, Grayscale's parent company DCG announced on March 10 that it plans to purchase $250 million in GBTC, but it seems that it is not very effective.

In the face of fierce competitors, the gray scale of "dominant one family" in the past has come to a bifurcation, and it is urgent to find new ways to change the status quo. Bitcoin ETF seems to be the best choice for Grayscale. Recently, Grayscale has been recruiting ETF-related positions, including ETF compliance chief, ETF product development expert, ETF sales director, etc., indicating that Grayscale's next goal is ETF