For several years, this ensured a demand for the trust shares, which at some point in time traded at a premium of 132% over the market price of Bitcoin.
Back in 2013, GBTC was rolled out as Bitcoin Investment Trust, an offering from the Digital Currency Group. It facilitates investors to gain exposure to Bitcoin through an open-ended private trust without investing in the cryptocurrency directly.
The institutional investors bought shares in GBTC, either through fiat money or Bitcoin. The shares normally traded at a premium over the spot market price of Bitcoin.
At the end of compulsory lockup period, the shares can be sold to other investors, with the extent of premium offering additional profit at the time of liquidation.
Nevertheless, as per financial data provider YCharts, the shares started trading at a discount of 0.68% on February 26. For better understanding, the shares were trading at a premium of 132.6% on May 31, 2017. The average premium was 37.97%.
Grayscale is perceived as one of the dominant firm in the crypto sector, with more than $31 billion worth Bitcoin under administration in GBTC Trust. This translates to 649,130 Bitcoins or about 3.09% of all Bitcoins so far generated. The Trust is also the biggest investor in spot Bitcoin market.
The Grayscale $GBTC premium is now negative for the first time since 2015. 😬
Sustained GBTC discounts could cause real pain across crypto lending markets. pic.twitter.com/at4MNak3jW
— Ryan Selkis (@twobitidiot) February 24, 2021
The shares of GBTC has since then rebounded and at the time of writing this article, the shares were trading with a moderate premium of 3.10%.
Analysts at JP Morgan have pointed out that Grayscale has been instrumental in moving the crypto market and Bitcoin in particular. JP Morgan also pointed out that the Trust’s purchases “are too big to allow any position unwinding by momentum traders to create sustained negative price dynamics.”
When GBTC Trust began trading at a discount, analysts was immediately worried. The crypto cynics immediately started discussing dooms day for Bitcoin. Peter Schiff, who is basically a gold advocate, was the first person to discuss about that. He tweeted that Bitcoin will plunge in the days ahead due to lack of buying pressure.
The @Grayscale Bitcoin Trust has traded at a discount to NAV all day. If this persists the Trust will have no more inflows and will therefore not be buying any more #Bitcoin. Without Grayscale, the biggest daily buyer, where will the new buyers come from to support the price?
— Peter Schiff (@PeterSchiff) February 23, 2021
Dan Morehead, the CEO of Pantera Capital, trusts that it could have a bearing on the cryptocurrency market. He opined that investors will not be interested in choosing a product that is being offered at a discount.
He said “If you buy it at a 20 percent premium then sell it at 5 percent, it’s not such a great trade.”
Grayscale, in addition to the purchase of Bitcoins, also lends support to the crypto and make sure that it does not decline sharply. Investors must compulsorily lock their shares for a period of six months. Notably, the GBTC shares can be only sold to any other interested investors. The Bitcoin holding remains in control of Grayscale.
David Fauchier, a fund manager at Nickel Digital has stated:
“Grayscale is Hotel California at the moment. Bitcoin can flow into Grayscale but not out. You sell the shares after six months, buy or borrow bitcoin and do it again.”