GBTC – Arbitrage Potential Or Just A Bitcoin Worrywart?

On Monday, I wrote about the weekend’s drop in Bitcoin and how its technical situation seemed to change nearly overnight. The 50-day moving average, which had been a bulwark of support during the cryptocurrency’s parabolic rise, instead became a source of resistance as it failed to contain last weekend’s fall. I attributed the bulk of the plunge to an ebbing of misguided enthusiasm ahead of last week’s Coinbase (COIN) listing, and I still believe that to be the case. But upon further research, I realized that I missed a possible warning sign in the valuation of the Grayscale Bitcoin Trust (GBTC). 

The trust has been trading at a discount to its net asset value (NAV) since February. This was a significant change since GBTC has traded at a premium throughout its existence. The fund was established in 2013, but I can only track its NAV from May 2015 when it became exchange-traded. Consider the following graphs, paying special attention to the right-hand side of the lower chart:

GBTC Price vs NAV Since May 2015

GBTC Price vs NAV Since May 2015

Source: Bloomberg

Here is a closer view of the same chart over the last 6 months, which makes the NAV discount easier to spot:

GBTC Price vs NAV Past 6 Months

GBTC Price vs NAV Past 6 Months

Source: Bloomberg

For those investors who are used to ETFs that generally mirror the NAV of their holdings, GBTC’s wild swings around NAV may seem confusing. GBTC is an open-ended unit trust, akin to a closed-end fund, and a relatively uncommon structure that avoided the SEC’s reluctance to approve crypto-linked ETFs. A trust of this nature can allow the creation of units on a delayed basis or halt them outright, and there is no facility for redemptions. This is in contrast to an ETF, which typically allows creation and redemption on a daily basis. If an ETF trades far enough above or below its NAV, arbitrageurs are incentivized to capture that differential by selling or buying the components of the ETF and redeeming or creating units as necessary. In the case of GBTC, the delayed creation mechanism meant that potential creators would expose themselves to market risk even when the trust traded well above its NAV.  Essentially, there was a steady demand for the trust and the market was unable to keep up with it. That led to the persistent premium attributed to GBTC, and the premium tended to widen during periods when bitcoin was rising sharply. 

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Disclosure: The analysis in this material is provided for information only and is not and should not be construed as an offer to sell or the solicitation of an offer to buy any security. To the ...

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