ViaBTC|Morgan Stanley Buys More Grayscale Bitcoin Trust. What is GBTC?

According to SEC filings from Morgan Stanley in late August, it bought upwards of 6.5 million shares of Grayscale Bitcoin Trust in June across more than 30 affiliated funds. With each share trading at $37.82, the total investment is about $240 million. This would make the investment bank the second-largest known holder of GBTC after Cathie Wood’s ARK Investment Management, which owns over 9 million GBTC shares.

Widely recognized in the sector of crypto assets, Grayscale is a wholly-owned subsidiary of Digital Currency Group (DCG), which is a Wall Street financial group focusing on blockchain and crypto investment. The group’s investments cover more than 150 blockchain companies in over 30 countries, including giants such as Coindesk, Coinbase, and Blockstream. Our focus today, Grayscale, is one of DCG’s largest crypto funds.

There are dozens of crypto trusts affiliated to Grayscale, including BTC trust, BCH trust, ETH trust, ETC trust, LTC trust, etc. Registered with SEC and fully compliant, Grayscale Bitcoin Trust is the largest crypto trust of Grayscale. This means the trust is one of the few compliant channels of passive BTC investment for institutional investors in the United States.

Grayscale Holdings as of September 1, 2021 (source: the official Grayscale Twitter account)

Buying GBTC comes with asset requirements. According to the trust, Grayscale’s private placements are only available to individuals with a net worth of over $1,000,000 or biannual income of more than $200,000 and entities with over $5,000,000 in assets. At the same time, based on previous reports by Grayscale, more than 80% of its clients are institutional investors.

We can tell that traditional investors are the primary clientele of GBTC. In the face of emerging markets such as cryptocurrencies, these investors are concerned with many risks, including the excessive learning costs and the custody, loss, and transaction of tokens, and a compliant trust is exactly what they need. Furthermore, as tax incentives are available for trusts in the United States, trust is a key component of asset portfolios for many American investors.

In addition to the high threshold, GBTC also has a variety of restrictions. For example, GBTC is sold regularly and cannot be redeemed, and investors can only sell their GBTC. As such, investors seeking profits from GBTC can only sell their shares in the secondary market, which further expands the scale of Bitcoins under the management of Grayscale. The trust has already become one of the biggest whales in terms of Bitcoin holdings. According to data from Grayscale’s official website, as of September 2, Grayscale Bitcoin Trust manages a total of $30.9 billion in assets, accounting for approximately 2% of the total Bitcoin market cap. In the past 12 months, the return on GBTC has reached 293.92%. Since the trust was founded, GBTC’s yield has hit 31,807.14%.

GBTC Overview (source: the official Grayscale website)

Meanwhile, according to SEC regulations, investors are not allowed to sell GBTC during the 6-month lockup. What this lockup mechanism means is that the BTC price corresponding to GBTC shares is not always identical with the real BTC spot price, and a certain level of premium or discount may exist. For investors, it is this premium that brings them arbitrage opportunities. For example, when the market premium far exceeds the borrowing cost, investors can borrow a certain amount of BTC and subscribe to GBTC shares. Then, 6 months later, they may sell the GBTC share in the secondary market. If investors are concerned with possible losses due to BTC declines within the lockup period, they can always hedge their funds in the futures market.

GBTC’s Premium over the Last Year (source: Skew)
GBTC’S In/Outflow over the Last Year (source: Skew)

The premium of GBTC peaked at the end of 2020, reaching 40%. But then came the bad times in February when GBTC’s premium dropped to negative figures, bottoming out at -20%. When the premium dropped below zero, the inflow of funds to Grayscale Bitcoin Trust also diminished.

BTC Holdings of Some Listed Companies (source: bybt)

The fact that GBTC cannot be redeemed means that its Bitcoin holdings can only grow larger, making Grayscale a strong bullish force in the Bitcoin market. Right now, many Wall Street institutional investors have made crypto investments through Grayscale Bitcoin Trust, and plenty of public companies have also announced their Bitcoin holdings, including well-known names such as Tesla, MicroStrategy (a US-listed business software tycoon), and Square (one of the mobile payment giants in the US). The conventional financial sector clearly has high hopes for Bitcoin and cryptocurrencies and is willing to contribute to this emerging market. As cryptocurrencies gain recognition from traditional finance, their scope and influence will continue to expand.

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