The Trust That Depressed Bitcoin Prices: What Is In Store For GBTC?

GBTC, or the Grayscale Bitcoin Trust, is one of the easiest ways for investors to have a slice of Bitcoin without actually holding the world's biggest cryptocurrency in their wallets.

You can easily invest in Bitcoin via the regulated stock market because of the GBTC. But the trust has also had an impact on Bitcoin prices previously.

GBTC allows investors to put their money in firms which are holding huge quantities of BTC in their holdings. GBTC roughly tracks Bitcoin price. This type of fund was luanched in 2013, aiming to provide new ways to invest in BTC.

In short, GBTC allows investors to gain indirect exposure to the world's first cryptocurrency through a private trust that holds huge quantities of Bitcoin via the stock market, which is regulated by the Securities and Exchange Commission (SEC).

As of Dec. 12, the Grayscale Trust held 645,622 Bitcoins, which is roughly 3% of the entire supply of the world's largest digital currency.

How does it work?

GBTC has gained huge popularity with many firms showing interest in cryptocurrencies but failing to capitalize on the same due to regulatory uncertainty. Although it is not yet a physical Bitcoin ETF that investors are still waiting for, it is based on the same principles.

As per Investopedia, the minimum investment for those who wish to subscribe to GBTC services as a private placement stands at $50,000 with an annual fee deduction of 2%. However, investors can also buy shares of the trust with a minimum quantity of 1 share.

The GBTC share is listed on the OTC Markets Group, which facilitates the listing of more than 10,000 over-the-counter securities like GBTC that are not listed on any major exchange like Nasdaq or NYSE.

One of the major advantages of GBTC is that it holds investors' Bitcoin for them, which is a fairly challenging task and also minimizes the exposure to volatility. However, a disadvantage, as pointed out by Andrew Left of Citron Research, is huge premiums and risk factors associated with volatility of the king of cryptocurrencies.

By putting money in the trust, investors gain exposure to the Bitcoin price action. The GBTC share prices are at a higher price than BTC when investors pile in and after the unlocking phase, the shares, which are redeemable for BTC, can be sold for a profit. GBTC tends to overshoot both up and down when compared to Bitcoin prices. It rises more than bitcoin when the digital currency soars in value, and falling faster than bitcoin when it declines in value. In one out of three trading days, the two prices move in opposite direction, according to Motley Fool.

GBTC unlocking and discounts

GBTC unlocking is a process in which the investors who subscribed to the trust as a private placement and locked away their investment for a period of six months, get their Bitcoins unlocked. This June, Grayscale unlocked around 40,000 Bitcoins which was the biggest in history with Cathie Woods-led Ark Investment having the biggest share.

This years GBTC unlock included investments from Q1 2021 and contributed to Bitcoin's huge dip in the month of June. The data from ByBt shows that the unlocking on June 18 was the biggest one and included a total of 16,240 Bitcoins.

Owing to the fear among the investors at that time, JPMorgan said Bitcoin prices will crash below $10,000 as institutions will cash out their six-month BTC holdings. The prices of BTC plunged below $29,000.

However, the ByBt data also suggests that GBTC shares are currently trading at a 20% discount rate which is the biggest since its inception in 2013 as the BIT or Bitcoin Investment Trust. This huge discount hints that the demand for GBTC shares are dropping and hence the decision of the trust to file for convertion into an ETF or exchange traded fund makes sense. The application is under review till july 2022.

Further, the GBTC holdings of investors are steadily dropping, ByBt data suggests. The drop in popularity of the Trust and the approval of BTC Futures ETF suggest that investors are considering other investment opportunities as well.

The GBTC that was created in the market in June resulted in BTC tipping below $30,000. However, it seems that the gradual decrease in popularity of GBTC and the increased interest in other investment opportunities is something to make note of.