The Grayscale Bitcoin Trust (GBTC) has been trading with a negative premium since February. The Bitcoin fund, which is available to institutional investors on the traditional exchange, has been trading below the Bitcoin price since February 22, 2021 – a sign that demand for the fund is drying up.
Just four months ago, GBTC’s premium was a whopping 33.12%. Since then, the premium has fallen into a downward spiral, hitting an all-time low of -14.34% on March 25th and is currently trading at -9.32%. What is amazing is that the Bitcoin price has increased by 57% over the same period – from $ 36,850 to $ 57,891. So what exactly happened?
Why is the premium still being traded at a discount?
Institutional buyers have always been the mainstay of the fund’s success. According to the GrayScale report for the third quarter of 2020, 80% of investments in the trust came from institutions.
Institutions often leverage their investments and take out massive loans in the process. For some firms, the goal was for GBTC’s rising premium to soften the interest rate on the loan – which clearly has not worked since late February.
It’s also important to note that the Grayscale Bitcoin Trust charges a 2% administration fee, requires a 6 month repayment period, and has large price discrepancies. In the past, institutional investors interested in investing in Bitcoin (how to buy Bitcoins via instant transfer instructions) had no other options.
But now exchange-traded funds are flooding the market, boasting far lower management fees and better service in general.
Take, for example, the Purpose Bitcoin ETF from TSX. The brand new ETF returned 23.62% last month – closely following the monthly increase in Bitcoin (for the Plus500 Buy Bitcoin guide) of 23.96%.
Grayscale’s Bitcoin Trust, on the other hand, is only up 14.14%. Of course, the negative premium and a myriad of other factors play a role in the slip. Nevertheless, the opportunity costs are massive.
What’s the future like?
As a result of all of this, institutions will likely seek to leave their highly leveraged positions as soon as their lock-up periods end. There are many better alternatives out there in Canada, and once U.S. regulators approve the country’s first ETFs, GBTC will no doubt lose ground as the leading bitcoin mutual fund.
Will the fund become obsolete? Most likely not – at least not in the near future. However, if Grayscale hopes to stay in the game, it needs to upgrade its services and provide more incentives to potential investors.
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