UPDATE: The Great Unlock of GBTC was uneventful as suspected. The unlock did not cause a panic sell of Bitcoin. Per the SEC documents of Grayscale Investments as researched below, this is not even possible even though many uninformed or sources of malintent stated otherwise.
Additionally, any major selling of GBTC shares by institutional private placements was swept up by ARK Invest. During the week of the massive unlocks…”Asset management firm Ark Invest purchased over 310,000 shares of the Grayscale Bitcoin Trust on Monday for its ARK Next Generation Internet ETF (ARKW) at $25 per share, according to published records from ARK Investment Management.”
Unless anything materially changes with the stated structure of Grayscale Bitcoin Trust the same actions should apply in the future. A massive unlock will not cause a sell-off of Bitcoin in the spot market. Investors transacting in GBTC have no direct effect on the price of Bitcoin.
Lately, a great deal of chatter and FUD surfaced regarding the upcoming unlocking of the Grayscale Lately, a great deal of chatter and FUD surfaced regarding the upcoming unlocking of the Grayscale Bitcoin Trust shares (GBTC). Misinformation abounds from the traditional financial markets, the mainstream media, and the ill-informed on social media. The current opinion is that the unlocking will dump a large amount of BTC onto the spot market and crash the price. Yet, there is publicly available information that states otherwise. Information derived from Grayscale’s documents disprove the misleading headlines and grant a much clearer understanding of the effects of the Great Grayscale Bitcoin Trust Unlock.
The Grayscale Bitcoin Trust is an investment vehicle that allows investors to get indirect exposure to bitcoin. Many institutions and financial firms are not allowed to own bitcoin or cryptocurrency due to varying reasons. Usually, the charter or some regulatory body prohibits them from investing in highly speculative assets and bitcoin is categorized as such in traditional markets.
But as a workaround, Grayscale Investments created a bitcoin trust. This trust is funded with bitcoin only. It holds no other assets, not even cash/USD. In return, the trust issues the investor shares called Grayscale Bitcoin Trust shares (GBTC). The stated goal provides institutional-type investors exposure to Bitcoin without having to actually own it. Grayscale attempts to tailor bitcoin into a product that meets the needs of traditional financial institutions. It allows investors to remain compliant and stay within the legal framework of their charters.
So how does Grayscale pull this off without being considered an ETF? Well, part of the deal is that these trust securities or “Shares” are only offered to accredited investors at the NAV price. And, per the Grayscale website, “Shares purchased directly from an Offered Product are restricted and subject to significant limitations on resale and transferability.” These restrictions, and exclusivity are what have allowed Grayscale to corner the ETF market without actually being an ETF.
The “limitations on resale” is where the 6-month lock-up applies. If you are an accredited investor and buy directly from Grayscale at NAV you must hold the shares for 6 months. You can’t sell, transfer, or redeem the shares during this time.
So in Q4 2020 and Q1 2021, there was a significant run-up during the first leg of the current bitcoin bull run. During this time the institutions wanted to get in on the action and because they couldn’t buy bitcoin they went heavy into GBTC. Subsequently, they were locked into the trade for 6 months. The demand for GBTC was astronomical making shares in the secondary market trade at a significant premium. But over the last couple of months, the value of bitcoin dropped by more than 50% and the premium for GBTC shares vanished, turned negative, and is currently at a steep discount.
So now, 6 months later, the current discussion is about how this unlock, of an extremely large amount of GBTC shares affects the price of bitcoin the asset. This misunderstood topic has permeated the bitcoin news cycle. JPMorgan instigated the FUD by publishing an article claiming the unlock will crash bitcoin’s price to 25k. And, as with all bitcoin FUD, many folks claim it as fact, perpetuate the sentiment, and all but guarantee a negative price movement. They claim institutional investors will dump a large amount of BTC onto the spot market as they unwind the locked up GBTC shares.
Herein lies the problem. Most people don’t actually know what they are talking about. They are repeating what they read or hear and most of it is patently false. And after a little research and digging around on Grayscales website including SEC Form 10-Q filings one can easily know the facts regarding the great Grayscale Bitcoin Trust unlock.
Most people can’t buy GBTC directly and currently, no one can.
As of July 2021, no one can purchase GBTC through a direct offering, not even institutional investors. According to Grayscale’s website, private placements aren’t currently offered. The only way to get GBTC right now is on the secondary market.
The reason? The current share price. Since February 2021 the shares trade at a significant discount to the price of bitcoin. So today, if an institution purchased directly at NAV the price would be above the secondary market price which would be a nonsensical trade. Also, according to the regulatory documents, Grayscale can issue unlimited shares. This means every time someone buys a private placement Grayscale “prints” new shares. It makes no sense for Grayscale to offer direct purchases while the demand in the secondary market is weak. Printing more shares increases the supply and lowers the NAV price. It’s simple supply and demand.
There are no redemptions of GBTC.
Even if you were a direct buyer in the past, redemptions are not possible. Per Grayscale’s own regulatory filings not a single GBTC investor can redeem their shares for bitcoin. More than once it’s explicitly stated along with the reasons why. In 2014 they ran afoul of regulations with the redemption process so it’s no longer offered. Furthermore, they aren’t even considering reinstating the program at this point.
At no time can you sell your shares back to Grayscale and have your capital returned. It doesn’t matter if you funded with BTC, USD, or any other currency. All shares issued, at least since 2014, are still outstanding. The FUD that investors are going to sell their GBTC holdings and somehow flood the market with bitcoin is false.
There is no way to directly redeem GBTC shares for bitcoin. If you want bitcoin for GBTC you must sell the shares in the secondary market for a cash equivalent then turn around and buy bitcoin with the cash in hand. In doing so the demand for bitcoin increases which adds upward pressure to the price! Regardless, if the whole point after the 6-month lock is to trade back into cash then the trade to bitcoin won’t happen. Thus, there is zero effect on the bitcoin spot market.
Grayscale Bitcoin Trust doesn’t sell Bitcoin except to cover expenses.
The Grayscale Bitcoin Trust is a passive trust and only accumulates bitcoin when shares are directly offered to investors. As stated earlier, Grayscale is not offering private placements so the trust is not currently accumulating new bitcoin. Nor is it selling large quantities of bitcoin. The quarterly reports show that selling is only permitted to pay the “Sponsor’s fees” (ongoing expenses). Previous Grayscale reporting verifies this information. In addition, the market has always absorbed the number of coins sold for this purpose. At no point will Grayscale’s normal operations substantially affect the bitcoin spot market even if there is a rash of share selling incurred by the GBTC unlock.
What is actually happening?
What is the likely outcome of this great unlocking event? The answer is found in the Q1 2021 Form 10-Q. The board at Grayscale authorized Digital Currency Group (DCG), its parent company, to buy shares of GBTC in the open market. Grayscale Bitcoin Trust now has a share buy-back plan. This seems to be action taken to protect the value of the shares if there is a massive sell-off. They essentially become their own buyer of last resort. Its plan was first authorized for $250 million in Q1 of 2021 and later increased to $750 million. And, as reported, they began repurchasing shares prior to April 30th in the amount of $193.5 million. So it seems Grayscale began and will continue to support the NAV by repurchasing large quantities of its own shares should investors flood the market when the lock-up period expires.
So these are some of the basic facts regarding the Great Grayscale Bitcoin Trust Unlock. This should be a non-event and in actuality places upward pressure on the price of bitcoin. The traditional financial sector and the media have again created, fostered, and promoted more fear, more uncertainty, and more doubt about bitcoin. What is new? Nothing is new and I hope this article helps alleviate a little of the Grayscale unlocking FUD directed at bitcoin.
May Your Stack Grow Ever Larger,