Grayscale: Bitcoin's Black Box (Part One)

Foreword: Before going into this piece, it should be noted that 'ycharts' was instrumental in facilitating this analysis. Their website is really good and I'd strongly recommend anyone reading this to go check them out. I am not affiliated with them in any way and they don't pay me and I don't pay them (I'm on a 'free trial' plan; yeah, I know, I'm an asshole for that). This is a legitimately useful fucking site - which you'll see time and again throughout this write-up.

This is the first in a series of articles that will show Grayscale is not only the primary force responsible for the Bitcoin bull market and its continued price rise, but also the most likely source of price collapse for Bitcoin in the not-so-distant future.

This part will provide a general survey of the GBTC (Grayscale Bitcoin Trust) vehicle and provide some historical context along with common-sense insight that may be hard to find elsewhere in the "crypto mainstream".

If you already have a very high-knowledge overview of Grayscale, then you can get away with skimming this first installment.

Grayscale's Bitcoin Trust is Suffering

Below is a picture of the Grayscale Bitcoin Investment Trust:

source: ycharts.com/companies/GBTC

In the screenshot above, we can see that the Bitcoin Trust shares are trading at a -7.28% discount to the NAV, which is steep to say the least.

However, this does not necessarily mean that the Bitcoin markets themselves are bearish.

Getting to the Bottom of the Perpetual Discount for Grayscale's Bitcoin Trust

For those that do not remember, Osprey announced that they would be opening up their own Bitcoin Investment Trust for private placement around mid-February 2021.

The official press release announcing these intentions can be found here: businesswire.com/news/home/20210216005811/e..

How Was Osprey Able to Compete With Grayscale So Immediately?

Its no secret that Digital Currency Group (the parent company of Grayscale) , has a near monopoly on blockchain at this point.

Its harder to say what Grayscale doesn't own, than what they do.

Given those facts, it should be fucking impossible for a competitor like Osprey to simply set up the same fund structure that Grayscale has (only difference is in the fees charged), and immediately compete right alongside them.

SEC Ruling From 2016 Set the Stage For Where Grayscale is Now

Grayscale's primary issue has been that their investors are unable to redeem their purchased shares.

The reason for that stems from an SEC ruling made in 2016, in which a cease and desist order was handed down to Barry Silbert and 'SecondMarket' (former name of Digital Currency Group).

sec.gov/litigation/admin/2016/34-78282.pdf

Grayscale (formerly known as 'Bitcoin Investment Trust') was found to be in violation of Rule144A and Reg M requirements among other things.

As a result of these findings, the SEC declared that Grayscale was no longer allowed to redeem shares in their Bitcoin Investment Trust.

Ensuing ETF Push

Given the fact that Grayscale had no viable means of redeeming shares for their users, the only seemingly logical option for Grayscale was to pursue an ETF.

Starting in 2017, Grayscale, their partners and numerous others have made pitches to the SEC in hopes that their particular proposal would be granted approval, but to no avail.

This Used to be a Non-Issue For Grayscale

Despite the fact that investors had no viable means of redeeming their shares for its underlying asset, their Bitcoin Trust still traded at a significant premium to the NAV.

NAV: This is the 'Net Asset Value', which "represents the net value of an entity"; in laymen's terms that's the average floating price on popular exchanges like Coinbase, Kraken, Bittrex, etc. [this is not an exact list - but you get the gist here]. So if Bitcoin is trading for an average of $48k on exchanges, then the NAV is $48k.

The reason for this was simply due to lack of competition.

Popular financial news website, 'etf.com', published a comprehensive overview of Grayscale's situation in 2017, that corroborate much of what was just covered above as well as a few additional facts.

The link to that piece can be found here: etf.com/sections/blog/be-wary-skyrocketing-..

Grayscale's Bitcoin Trust Premium Was Built From Lack of Viable Competition

The article notes that Grayscale was able to continue obtaining investors willing to pay at a premium mainly due to its unique position as the only provider of this unique Bitcoin financial instrument.

Specifically, the article states that:

"For investors who don't want to go through the hassle and risk of buying bitcoin directly from a digital currency exchange and storing it themselves, GBTC is, in many ways, the only game in town."

The only thing that the article omits is that many funds are actually prohibited from investing directly into Bitcoin explicitly. So Grayscale's Bitcoin Investment Trust serves as a viable 'workaround' for those looking to still gain exposure to the asset (in some capacity).

Winklevoss BItcoin Trust ETF Served as Foreshadowing

Around March 2017, a few curious events took place, which ultimately served to confirm running theories that Grayscale's premium & position in the market was due solely to its lack of active competition.

The ETF.com detailed the events that transpired around this time, stating:

"The Winklevoss Bitcoin Trust ETF (COIN) was rejected by the SEC in March [2017]. The commission didn't allow the ETF to see the light of day beacuse it was concerned about the lack of regulation in bitcoin markets, which could harm investors. Yet COIN coudl be vastly superior to th e readily available GBTC, which is likely to burn investors at premium prices.

"GBTC's sponsor Grayscale is well aware of the deficiencies in its product. January, the firm made a filing with the SEC to do an initial public offering on the NYSE. Grayscale also lined up three APs to replace its affiliate Genesis, if the filing is approved." [neither of those filings were approved either]

*"In other words, the sponsor hopes to convert GBTC into a fully fledged ETF."

With all of those details above, the most important fact was conveyed in the following observation from the article:

"If COIN or another bitcoin ETF comes to market and competes with GBTC in its current form, the latter will likely see an exodus of assets as investors gravitate toward the superior ETF structure."

"Indeed, in March, when it looked like the SEC could green-light the Winklevoss ETF, GBTC's premium briefly dropped to zero as demand for the product waned."

Osprey's Successful Launch is What Accelerated and Ultimately Catalyzed the Evaporation of the Grayscale Premium

Let's take a look at how the Grayscale Bitcoin premium has evaporated over the past few months:

The picture above makes it immediately obvious that Grayscale's Bitcoin Investment Trust has been suffering since mid-December.

Specifically, at its height (over the past year), Grayscale's Trust was trading at >40%+, relative to its NAV (Net Asset Value).

Grayscale's Abysmal Trust Performance Hasn't Escaped Scrutiny From the General Public

source: bloomberg.com/news/articles/2021-01-22/bigg..

Bloomberg Incorrectly Assigns a Reason to Grayscale's Falling Price % Relative to the NAV

In the article, a trader from 'WallachBeth Caiptal', stated:

"'When there is a big move to the downside, bids tend to drop and that premium ends up collapsing beacuse investors are trying to get out of positions'"

However, when we take a look at GBTC's price relative to NAV (premium / discount), it becomes immediately clear that the sinking NAV has had nothing to do with "a big move to the downside", or even bearish momentum (as suggested by the assertion that, 'investors are trying to get out of positions').

Taking a Look at Bitcoin's NAV vs. Discount / Premium to NAV

To break this down for a second, the chart that we're going to look at below contains:

A) One line to represent the NAV: 'NAV' stands for Net Asset Value. This is essentially the "reference price" of Bitcoin based on its average floating price on various exchanges.

B) Bitcoin Trust Discount / Premium to NAV: Grayscale Bitcoin Trust's raw % premium / discount to the NAV ; essentially if the Trust is trading above the NAV, that's a premium, below is discount.

If the trader's theory on Bloomberg is correct, then we should see the Grayscale Bitcoin Trust's premium descend into discount territory proportionately with the 'Net Asset Value'.

Let's see if this theory holds up:

At a glance, it appears that this theory is not supported at all. As Grayscale's premium descends into discount territory, the NAV continues to rise.

Pearson's Coefficient

Fortunately, due to the expansive tools that 'ycharts' offers, we're able to track the correlation between the variables that we outlined above.

The bottom panel of the chart above shows that the correlation (Pearson's Coefficient), moves from one end to the other (which is interesting)

In the next chart below, on the bottom panel, we can see that there was a 0.715 correlation between the two variables (NAV v. Premium/Discount):

In the three months since that point (12/24/20-03/28/21), the Pearson's coefficient moved all the way over toward -0.684

Below is the interactive embed code for the charts for those that wish to play around with the data here:

GBTC Net Asset Value Chart

GBTC Net Asset Value data by YCharts

If the chart is not interactive on your page, then just click on it and it should take you directly to their page

Grayscale Bitcoin Investment Trust EMA Analysis

Below is a chart showing GBTC's raw ticker price with several EMAs (exponential moving average) applied to it.

Specifically, the 12, 26, 50, 100, 150, 200 periods.

GBTC Chart

GBTC data by YCharts

If you click on the chart above, then it should take you to a website called 'ycharts' where I specifically constructed it.

Brief Takeaways

  1. All of the EMA's are stacked on top of one another (smallest time frame - largest time frame; top to bottom)

  2. It does appear that the EMA-12 may cross under the EMA-26 soon, but that's about as bearish as the EMAs will be fore the foreseeable future.

  3. The actual ticker price for GBTC is hovering around the EMA-50 line. This means that the current price of the underlying asset (GBTC) is trading right around its average for the past 50 days.

Also of Note

The RSI(14) for GBTC has been on the decline since February 19th, 2021:

This actually mirrors the price activity as well if we swap over to that site for a second.

Grayscale's Bitcoin AUM is Taking a Beating

Taking a closer look at the chart itself, we can see that Grayscale's total assets under management have decreased by >$4B:

above is the first photo showing Grayscale's Bitcoin Trust had hit its ATH ($38B) on March 18th, 2021

above is the second photo, showing Grayscale's AUM in their Bitcoin Trust had declined by over >$4B

Identifying the Cause For the Decline

Despite being able to identify a decrease in the value of the AUM for Grayscale's Bitcoin Trust, we need to gather more information before we can definitively state whether this decrease in AUM was due to depreciation in the underlying asset (i.e., Bitcoin), or programmatic sell-offs promised to investors by Grayscale.

Checking the Total Supply of the Grayscale Bitcoin Trust

Below we can see the total supply of the Grayscale Bitcoin Trust as well as the price of Bitcoin on March 18th:

In the screenshot above, we can see that the price of Bitcoin was $57.56k and that Grayscale held 655,070 bitcoins at that point in time.

On March 26th, 2021, the price of Bitcoin was $53.95k and GBTC's total holdings stood at 654.78k.

Conclusion: Price Has Throttled Down the AUM Value of the Trust

From March 18th to 26th, Grayscale sold approximately 207 bitcoins, which amounts to approximately $17 million.

This total obviously would barely put a dent in the AUM.

However, over that same span of time, the price of Bitcoin declined from $57.56k to $53.95k, representing an approximate $3.61k decline per unit of Bitcoin.

  1. On March 18th, the price of Bitcoin was $57.56k. Thus, with 655k (approx.) bitcoins in their Trust, its value stood at $37.7B (at least) then.

  2. On March 26th, the price of Bitcoin was $51.95k. The total number of bitcoins in Grayscale's Trust reportedly has 654.78k bitcoins remaining, bringing the total Trust value to $34 billion AUM on that day.

Grayscale Investors Are Taking the Biggest Haircut

As mentioned before, Grayscale's Bitcoin Trust is now trading at a massive discount to the NAV at the time of writing.

This is really bad, because that means that those that invested in Grayscale's shares at the beginning of the year may find themselves the victim of any implosions related to Grayscale.

Osprey Bitcoin Investment Trust

To emphasize the fact that Grayscale's condition (relative to other competing Trusts) is mutually exclusive, we're going to first take a look at the Osprey Bitcoin Investment Fund.

Evaluating the Health of the Osprey Bitcoin Trust

Osprey provides information about the state of of its Bitcoin Trust on its site

According to the screenshot above:

  1. Ospreys' Bitcoin Trust is currently listed with a market price of $21.07.

  2. The closing NAV Osprey funds was $18.32

Therefore, Osprey is currently trading at a premium of +15%.

The implications here are enormous - but given the breadth of content that was covered in this write-up, we're going to wait until the next write-up to start digging into why this could have absolutely horrible consequences for the entire blockchain ecosystem (and how Osprey could be an unlikely hero in this situation).

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