Demystifying the truth that Grayscale has been buying, buying, and buying

Grayscale, the "grayscale" in the currency circle, has not stopped buying bitcoins, even if it is a high-priced bitcoin exceeding $17,000.

On November 17, Grayscale’s BTC trust holdings increased by 1,773 BTC. As of now, Grayscale holds more than 500,000 bitcoins, accounting for 2.38% of the total bitcoins. If the lost bitcoins are excluded, the number of bitcoins owned by Grayscale should account for 3.37% of the real circulation.

With arrogance, buying as much as you produce, and like Pixiu, you can only see in but not out. Many people have begun to face up to this very popular Bitcoin fund:Who the hell is buying? Why do investors prefer to pay a high price management fee of 2% instead of buying Bitcoin directly? Is it really profitable to do so?

With the issues that everyone cares about, we will take a good look at grayscale today.

By reading this article you will gain answers to the following questions:

1. Background and introduction of grayscale

Briefly talk about the background of grayscale. Behind Grayscale is DCG—Digital Currency Group, which is an invisible giant in the currency circle, and its business layout covers half of the currency circle. At the same time, DCG Group is inextricably linked with MasterCard, NASDAQ, the Chicago Stock Exchange, and the Bitcoin core development team.

As an asset management company, Grayscale has a wide range of products, including BTC trust, BCH trust, ETH trust, ETC trust, LTC trust and so on. Among them, both the BTC trust and the ETH trust have been registered with the US SEC, and the compliance qualification makes Grayscale have no competitors in the same market.As long as the Bitcoin ETF is not approved for a day, Grayscale will enjoy an absolute monopoly.

Grayscale’s products all have a minimum investment threshold. The threshold for GBTC is US$50,000, and for other trusts is generally US$25,000. All assets are stored in the cold wallet of the Coinbase custodian, and a management fee ranging from 2% to 3% is charged annually.Among them, the management fee of Bitcoin Trust is the lowest, which is 2%.(Note: Coinbase is also owned by DCG)

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2. Design of Bitcoin Trust

Since the scale of GBTC accounts for more than 90% of Grayscale's overall asset management scale, we will discuss it separately here.

Released in 2013, GBTC is the first publicly traded Bitcoin investment vehicle. Until January 2020, GBTC was successfully registered with the US SEC. Compliance enables it to harvest a broader market, and Grayscale’s newly added assets under management in the past two years far exceed the accumulated assets of the past six years.

1. Design features of GBTC

(1) Non-redeemable

In order to meet the SEC's regulatory rules, Grayscale has set up a "non-redeemable" mechanism for the trust. Investors can only buy it and cannot redeem it. This feature directly eliminates the liquidity crisis of the seller of Bitcoin, and completely eliminates the chance of selling and smashing the market. This is why Grayscale is called Bitcoin "Pixiu".

(2) GBTC shares can be traded in the secondary market

Although GBTC cannot be redeemed, GBTC shares can be circulated in the secondary market in the form of stocks. However, according to SEC regulations, the GBTC held by investors must be locked for 6 months before they can be traded in the secondary market.

(3) The handling fee is based on Bitcoin

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2. The scale and share of GBTC

You can find relevant data of GBTC on the official website of Grayscale, such as asset management scale, issued shares, and the number of bitcoins per share.

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(Data date: 2020/11/19)

3. The subscription mode of GBTC

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(Note: Genesis is a subsidiary of DCG Group)

Guess which subscription model is the most?

The answer is, the Bitcoin funding model.

In the 2019 Q3 report, Grayscale indicated that from January to September 2019, 79% of investors chose to invest in kind (Bitcoin investment). In other words, most of the bitcoins flowing into GBTC come from bitcoins already in circulation on the market, and it is not that "Greyscale is buying newly mined bitcoins" as everyone thinks.

Investors obviously own bitcoins, why would they rather pay 2% of bitcoins every year, but also exchange BTC for GBTC that can never be redeemed?

On the official website, Grayscale spends a lot of time convincing everyone why they should buy GBTC shares instead of buying Bitcoin directly. The reasons it gives are:

• Don't worry about the security of bitcoin storage.

• Avoid the effects of non-compliance, theft, price decline, etc. when purchasing on exchanges.

• It is similar to a security and is easily transferable to beneficiaries under estate law.

These reasons are not enough to support Grayscale's strong bitcoin inflows in the past two years.

You should have heard about the news that some Nasdaq-listed companies bought Bitcoin a while ago. Obviously buying directly can save 2% of the annual fee, why do you have to buy it on Grayscale? If it is really for the sake of safety, it is even more unnecessary: ​​Grayscale itself does not store bitcoins, and all investors' bitcoins are stored in Coinbase's custody institution. There are many professional bitcoin custody service providers on the market, and the handling fee is lower than that charged by Grayscale. If institutional investors really want to enter bitcoin, grayscale is not an optimal option.

Obviously, compared with Grayscale's sales ability, "profitability" is the reason for investors to spend a lot of trouble.first level title

3. How to use GBTC to arbitrage?

The GBTC on the secondary market has been at a premium for a long time: the market circulation value of each GBTC > the value of the embedded Bitcoin.

In the past 5 years, the average premium of GBTC was 38%, and the highest reached 132%. The arbitrage space is very considerable. Investors who are looking for a rate of return must love this "pure land" very much.

The simplest arbitrage method is that investors use cash (or Bitcoin) to buy GBTC shares. After the 6-month lock-up period, they choose the right time to sell the shares in the secondary market. profit. The biggest risk of this method is that Bitcoin will fall, resulting in no profit or even loss. In this case, reverse shorting can be used for hedging.

The second way of arbitrage is to use Bitcoin lending arbitrage.

Institutional investors borrow BTC on the lending platform and give it to Grayscale to replace the primary market share. After the lock-up period expires, they sell it at the right time, and at the same time buy BTC and return it to the lending platform. The premium income minus interest and other expenses is the profit.

Grayscale’s brother company, Genesis, provides this kind of lending service. The figure below shows the growth of Genesis’ loan service. Since 2020, business demand has soared. In Q3, loans of US$5.2 billion were issued. Grayscale is completely irrelevant.

The third way of arbitrage is to use GBTC share loan arbitrage.

Investors directly borrow GBTC shares and sell them in the secondary market at an appropriate time. At the same time, use cash or Bitcoin to exchange for GBTC shares in Grayscale, and repay the borrowed GBTC shares after the lock-up period. There are two fees involved here. One is the borrowing cost of GBTC. According to online information, the current borrowing cost is close to 15%. The second fee is an annual fee of 2%. If the GBTC premium does not exceed 17%, then this strategy will fail .

The fourth way is to lock in premium arbitrage.

Investors use cash or Bitcoin to exchange for GBTC at Grayscale, and at the same time, when the market price of GBTC is higher than the net asset value, borrow GBTC off-site and short. In the end, no matter whether GBTC rises or falls, the profit is fixed.

By comparing the number of GBTC issued and the ratio of short selling, we can find that whenever the number of GBTC issuance slows down, the ratio of short selling in the market begins to stagnate or even decrease.

Here is a summary:

In the first case, arbitrage using market spreads. When the GBTC price is higher than the initial cost, it is possible to make a profit;

In the second case, Bitcoin lending arbitrage. The premium part of GBTC when selling is deducted from the relevant expenses, which is the profit;

In the third case, GBTC share loan arbitrage. When selling, the GBTC premium exceeds 17% (this value will fluctuate up and down) to be profitable;

In the fourth case, short GBTC arbitrage. The premium minus 17% (this value will fluctuate up and down) is the profit margin.

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4. Who buys Bitcoin behind Grayscale?

Grayscale is the biggest "brand player" in the Bitcoin buyer's market in 2020. Judging from the figure below, this growth trend has not stopped. So, who is behind Grayscale who continues to "recharge" Bitcoin?

According to the information publicly disclosed by Nasdaq, as of the end of September 2020, GBTC had a total of 32 institutional investors. Here we only list institutions that hold more than 10,000 GBTC:

The one with the most positions is BlockFi,Occupying a 4.5% share of GBTC, it is a well-known lending company in the currency circle. Users deposit BTC or ETH to obtain interest. At the same time, BlockFi also provides loan services to lend funds to institutional users. Investing in GBTC is also one of the ways to improve asset liquidity and profitability.

The second largest holding is Sanjian Capital,It is currently one of the most active cryptocurrency hedge funds. It has successively invested in projects such as AAVE, Synthetix, and Kyber, leading the wave of DeFi this year, and has gained a lot. Its co-founder Su Zhu has a strong bullish sentiment on GBTC, saying inflows will drive a premium.

Not all institutions belong to the currency circle,For example Ark Investments (AKR), its founder Catherine Wood has a name on Wall Street: the female version of Buffett. She loves technological innovation and once invested in Tesla when everyone was not optimistic. She is also a well-deserved die-hard fan of Bitcoin, once declared that Bitcoin is "far greater than Apple." Back in 2015, when the price of Bitcoin was below $250, a large amount of GBTC was bought. Until September this year, the fund was still increasing its holdings of GBTC.

famous"Rothschild Investment Company"It is also in the list of GBTC holdings. There are not many positions, 24,500 GBTC, which only accounts for 5/10,000 of all GBTC shares, and the current value is about 500,000 US dollars. Although these hundreds of thousands of dollars are almost negligible for a company that manages more than one billion dollars in assets, it also means that this ancient capital has not completely ignored the cryptocurrency field.

In fact, the above list is only a small part of Grayscale buyers. After a little calculation, you will find that the sum of all institutional shares in the above picture is less than 15% of the total amount of GBTC—more holdings Personal information is not disclosed in the market, and if the mysterious power behind Grayscale is not disclosed voluntarily, the general public may never know its true face.