Published: December 25th, 2020
Crypto asset management giant Grayscale Investments has added a massive amount of BTC to its store of digital assets under management. The firm’s Bitcoin holdings grew by roughly 56,000 BTC in the last week alone. That means it’s now looking after more than $11.1 billion worth of Bitcoin, or 2.7% of BTC’s total supply.
Bitcoin has been flowing into the firm so rapidly that CEO Barry Silbert recently tweeted that Grayscale is now the “fastest-growing asset manager of all time.”
Analysts say the sudden accumulation is due to the Grayscale Bitcoin Trust (GBTC) being one of the few publicly-traded Bitcoin instruments available in the US.
In a note to investors, market analysts at crypto trading platform Hrxo Labs explained that most institutional investors still place strict limits on investing in crypto assets directly. With Grayscale, they have a regulated proxy that gives them indirect exposure to the asset class.
Grayscale’s Bitcoin Trust is registered with the SEC and fully regulated. It can even be used in retail banking products like Individual Retirement Accounts (IRAs).
Having regulatory oversight means banks offering IRAs, family offices, and institutional can gain exposure to BTC price movements and use digital assets as a hedge against inflation, without the worries of custody services or using an unregulated crypto exchange.
Demand for Grayscale’s GBTC is also driven by spiking institutional interest. 2020 is widely seen as the year that traditional finance finally bought-in to crypto’s potential, with big-name fund managers like Paul Tudor Jones committing more than $70 million to Bitcoin futures earlier this year. UK fund managers Ruffer Investments announced just this week a new $750 million BTC position.
Meanwhile, tech companies like MicroStrategy and Square have pushed the envelope further. MicroStrategy bought 40,823 Bitcoin valued at over $900 million in September and announced a new funding round last week of $650 million to purchase more. Payments software developer Square bought-up $50 million in BTC this past October.
All these moves are pushing up institutional demand. But gaining safe exposure to Bitcoin price moves isn’t the only thing making Grayscale’s offer so popular.
Grayscale’s GBTC Bitcoin offering has become hugely popular. It is currently trading at about USD 23.24, with 0.00095 Bitcoin comprising each share. Shares have a 6-month lock-in from the purchase date. According to a Grayscale report published earlier this year, most GBTC buyers, some 83 per cent, are institutional investors.
Some of the biggest from traditional finance are asset manager Horizon Kinetic and hedge fund ARK Invest. ARK holds more than 8 million in GBTC while Kinetic has 5.1 million GBTC across its portfolio.
Big crypto-focused players include blockchain-based lenders BlockFi and Singapore-based Three Arrows Capital. The two companies’ combined hold own over USD 1.3 billion in GBTC, which equals roughly USD 750 million in BTC.
Grayscale’s fund moves as the price of BTC moves, which means its beating traditional indices handily. GBTC investors pocketed a tidy 30 per cent on their positions over the past four weeks, and 180 per cent this year — compared to the 12 per cent the S&P gave its investors this year.
Because GBTC trades at a 25 per cent premium on Bitcoin’s spot price, some investors see opportunity for an arbitrage trade, where capturing the premium is the objective. Those moves are boosting GBTC’s liquidity.
The mechanics of these arbitrage trades go something like this: investors short GBTC shares, which trade at a huge premium, and then go long on GBTC shares with their 6-month lock-in. As the price of Bitcoin rises and GBTC share prices increase, the short position balances out the long position. The investor reaps the 25 per cent premium.
Hedge funds are understood to be heavily involved in GBTC arbitrage plays. There’s an argument to be made that such arbitrage plays are also helping drive BTC’s price upward.
As more Bitcoin goes into GBTC with its attractive premium, arbitrage players are incentivized to buy GBTC and then find a way to hedge any exposure and gain a risk-free return. That has the effect of drawing in a different class of Bitcoin buyer.
Gold investor and Bitcoin bear Peter Schiff has suggested Bitcoin’s recent run might be the work of GBTC arbitrage trades. Grayscale’s accumulation spree has pushed up BTC’s price and attracted more buyers, which stokes the price.
All the talk of arbitrage bets on GBTC could fade as new competitors enter the digital asset management market.
Crypto exchange Bybit published a study earlier this year that suggested high-premium instruments could diminish as newer offerings like the new Bitcoin exchange-traded fund (ETF) from Wilshire Phoenix gain market share.
A proliferation of crypto ETFs will collapse GBTC’s attractive premium, removing the incentive for arbitrage plays.
GBTC could also see a sell-off if Bitcoin corrects to a lower price. That’s what happened in 2017 when the infamous ‘Bitcoin bubble’ burst and GBTC fell from USD 38 to USD 9 in less than a month.
But for now, Grayscale’s Bitcoin wheel is likely to keep spinning. As Bitcoin’s price continues to rise, demand will be fed by fear of missing out (FOMO), more institutional investors are likely to see opportunity in GBTC and drive any number of major moves.
As of Wednesday, BTC/USD had risen to 23,733 in early morning trading, extending gains from the previous day. GBTC was trading at USD 30.39.