Grayscale’s Bitcoin Trust (GBTC) is currently facing massive outflows totaling $594 million. Meanwhile, Grayscale also transferred 9,840 BTC worth $418 million to Coinbase Prime, bringing the total number of transfers since January 12 to 41,478 BTC. This over $1.7 billion operation related to processing redemptions sheds light on the challenges GBTC is currently facing.

Historically, GBTC has not sold Bitcoin but redeemed its shares for U.S. dollars, making it a major holder of Bitcoin. However, the approval of spot ETFs prompted investors to withdraw their funds due to the huge annual management fee of 1.5% (significantly higher than competitors).

In addition, the disappearance of GBTC’s previous 40% discount caused many investors to withdraw, forcing GBTC to sell BTC to meet redemption requirements. The process is expected to take weeks and is affecting Bitcoin's short-term trends.

The reason for Grayscale’s outflow has sparked some speculation, with some blaming the outflow in recent data on delays in the T+1 accounting and settlement process. Others on social media pointed out that Grayscale’s ETF has high fees, specifically its 1.5% expense ratio, making it an expensive spot Bitcoin ETF in the United States.

Cryptocurrency investor Scott Melker echoed similar sentiments, clarifying that Grayscale is not actively selling Bitcoin in the market. Instead, when people sell Grayscale’s GBTC (Grayscale Bitcoin Trust) shares, Grayscale must sell a corresponding amount of Bitcoin to manage the fund. This is not malicious behavior; this is how ETFs work.

How GBTC works

If you own 10,000 BTC, you might be thinking about how to do risk-free arbitrage to minimize risk. Instead of converting BTC into cash and depositing it in a bank to earn interest, those individuals or institutions with large amounts of Bitcoin are more inclined to look for low-risk investment opportunities rather than just pursuing high annualized returns.

Grayscale is clearly one of the top players in this space. However, many users in the currency circle know little about Grayscale. They only know that they have been buying Bitcoin and buying it at a higher price than on the exchange. Some may think they are crazy because not only is the purchase price higher, but they never seem to sell. Does this mean they are a bunch of stupid people?

In fact, the truth behind it is that Grayscale is a group of masters who make huge wealth through this method and are also controlling the future of the currency circle. Today, I will try to answer these questions in the simplest terms.

1. Who is grayscale?

Grayscale Investment Trust was founded by Digital Currency Group in 2013, while DCG is the world’s most powerful currency investment institution, with almost all mainstream currency transactions you are familiar with. All projects are closely related to it.

As a subsidiary of DCG, Grayscale manages multiple funds including BTC and ETH. BTC and ETH have passed SEC certification and have become the only choice for legal investment by institutions and retail investors in the US stock market.

According to the official second quarter investment report: Grayscale’s cumulative investment in digital currency has reached US$2.6 billion, and the total investment received in the first half of 2020 was US$1.4 billion. An average of US$43.8 million is invested in buying Bitcoin and US$9.4 million in Ethereum every week, with 85% of the funds coming from institutional investors such as hedge funds.

Currently, Grayscale is buying Bitcoin at a rate that exceeds the number of newly mined Bitcoins during the same period. The number of investors is also growing rapidly, with growth in the second quarter double that of the first, with new investor inflows reaching $124.1 million, accounting for 57% of the investor base.

In short, Grayscale’s increasing Bitcoin buying efforts have outpaced the number of newly mined Bitcoins on the market. This phenomenon is more significant than the "Bitcoin halving" effect.

2. Who is buying?

Although Grayscale is a fund company, I prefer to compare it to a special exchange, which may be easier to understand. As a legally established investment company, Grayscale is currently the only company among U.S. pension plans that can purchase Bitcoin.

In other words, if institutions want to buy Bitcoin or Ethereum, they must do so through Grayscale.

However, in contrast to this, when the "exchange" Grayscale "sells" Bitcoin or Ethereum, it actually goes through two steps:

First, conduct a private placement and open subscription to GBTC to qualified institutional investors (you can understand it as a Bitcoin voucher issued by Grayscale). After institutional investors purchase, there is a six-month lock-in period (previously 12 months) during which they cannot be transferred.

In the second step, after the unlocking period is over, institutions can sell GBTC to retail investors in the US stock market, and retail investors in the stock market are responsible for taking over GBTC.

Therefore, this is a take-over game for an exchange that does not allow withdrawals. It is very similar to the situation where the prices on various exchanges varied greatly when FIL was launched recently.

Interestingly, GBTC has always maintained a very high premium, reaching a peak of 25.4 times, and it still has a premium of 1.2 times. Why is there such a high premium? This involves another complex trading behavior. Simply put, price in the stock market is never equal to value.

You can't simply use the actual price of BTC to explain why the price of GBTC is so much higher than Bitcoin. Perhaps you can imagine BTC as a company, and the behavior of investors buying GBTC is like speculating in stocks. Although this metaphor is not entirely accurate, it is relatively easy to understand.

Now we understand this phenomenon, but the essential question has not yet been clarified: Are institutions buying GBTC because they are optimistic about BTC?

3. Who will take over in the end?

There are always various reasons for retail investors to buy a stock or a currency, and these reasons can be called "optimistic". However, as my previous article pointed out, this is the game posture of the bottom players - institutions do not care about being bullish, their only concern is arbitrage.

In other words, in the eyes of institutions, it doesn’t matter whether Bitcoin is a scam or a revolution. They only pursue risk-free arbitrage opportunities. Do you remember what I said at the beginning of the article? Now let's play a role-playing game.

Suppose I hold 10,000 BTC or assets of equivalent value, I will definitely not open a 100X contract, but I still want to make more money. So I looked for a risk-free way to make money, but certainly not by depositing money in a bank. On the one hand, banks do not accept BTC, and on the other hand, DeFi in the currency circle is too unsafe for me.

Grayscale provides a wonderful opportunity for me to buy GBTC, regardless of the price - after all, there are always takers in the secondary market, and I can get at least 20% profit. I just need to make sure that I don't lose my principal after buying it. It's not difficult, there is a contract.

To get a 20% to 200% premium profit on buying 10,000 BTC worth of GBTC on Grayscale, I could open a 1X short order with 5,000 BTC (or equivalent funds) and then use the other 5,000 BTC to buy GBTC is locked.

After six months, I can sell GBTC and make a profit. Due to the existence of the contract, my principal will not be reduced: during the six months of locking up, if BTC rises, although my short order will suffer a loss, the price of my currency will rise and the value will still be maintained; if the price of BTC falls, The locked BTC depreciated, but my short order made money.

In other words, I found a completely risk-free arbitrage opportunity. My property will not be less, but after six months of trading, I have obtained a risk-free return on investment. This is better than stock trading. Don’t underestimate 20%. After all, my total assets are US$120 million, and 20% is a considerable amount. This is the strategy of top players.

So, what if no one takes over and GBTC cannot be sold at all? At present, there seems to be no need to worry about this risk because the market demand is strong. Moreover, even if there are no other buyers, Grayscale itself can take over the deal and conduct "arbitrage" in another form, because as long as this investment game continues, Grayscale can make profits. In fact, Grayscale earns about 7,000 BTC every year through huge management fees. As long as they can maintain profitability, it is feasible for them to take over the business themselves.

4. Impact on market conditions

Grayscale’s purchase of BTC is only one of the effects, and it is not enough for me to tell you that the mad cow is coming. If you are not involved in contract trading, you may not have noticed that in the above-mentioned grayscale transactions, there are signals that the bull market is coming. This is a shocking opportunity.

In fact, even though Grayscale has been buying on a large scale, the price of the currency has been falling over the past few months, which seems to indicate that Grayscale’s buying has little to do with the price of the currency. In fact, I have mentioned before that the increase in the amount of Grayscale GBTC you see is probably just the result of the big guys using their own BTC to participate in private placements.

However, with the massive unlocking period coming, things may look different.

Review two situations:

First, Grayscale is currently buying more Bitcoins at an increasingly faster pace, and institutions are constantly joining in. Among the opportunities provided by Grayscale, some institutions or companies that are relatively optimistic about Bitcoin can directly purchase BTC to participate in this risk-free arbitrage opportunity.​

The second is that all participating institutions will open contracts for hedging. Of course, if they do not open contracts, then if the currency price rises, theoretically they will make double the profit, but big funds usually prefer stability.

Since April this year, the number of grayscale locks has been increasing, and starting from October, a large number of GBTC will be unlocked. At this time, institutions may sell GBTC in the market, that is, private equity institutions begin to clear their positions. But they are not selling BTC directly, but by selling the GBTC in their hands. The "stock" price has been rising, attracting retail investors to continue to take over.

Directly related to the currency circle, every time a certain amount of BTC is unlocked, it needs to be bought and shorted in the contract market. If you’re not familiar with the term “shorting,” it means that institutions don’t care what the current price of Bitcoin is. Once the unlock time is up, they will directly close the position. In the contract market, closing a short requires a buying operation, which pushes the price higher.

At present, the size of the contract market has far exceeded that of the spot market. In this process, this bull market will be led by BTC and influenced by the contract market. Having said that, sometimes I feel a tinge of tragedy for those who ridicule and attack me. I once said that I am not willing to be a low-level player forever and am working hard to become a mid-level player. However, some people seem to only understand contracts and transactions at the level of gambling, as if the world is the well they see. #ETH #ALT #UMA #BTC $BTC $ETH