CRYPTO MOVERS AND PRICES
Crypto is up marginally this morning as bitcoin (BTC) begins to threaten again towards USD 20,000. Spot volumes are up about 10% from yesterday's depressed levels.
Crypto Story of the Day
This afternoon, we're highlighting the “GBTC spread” trade. We provide an overview of the structure and explain how there are arguably more straightforward, higher-yielding trades all over the space.
The Grayscale Bitcoin Trust (GBTC) was the first publicly quoted U.S. investment vehicle and the first to obtain status as an SEC reporting company. The trust was established in 2013 by the Digital Currency Group (DCG), which was founded by well-known Bitcoin investor Barry Silbert. In 2015, the trust was listed on the OTC Pink sheets. Amid a combination of growth due to bitcoin (BTC) appreciation and asset gathering, GBTC Total Assets Under Management (AUM) has impressively grown to over USD 10 billion since inception, making it the largest regulated, listed exchange product. That said, the product is far from perfect. Long hold periods (at a time over a year, now 6 months) and high costs make the product clunky for investors.
Furthermore, these long hold periods have made it difficult to manage the actual traded price of the product versus the Net Asset Value (NAV) of the underlying BTC. As a result, the GBTC has seen a fluctuating premium versus NAV and currently sits at an over 20% premium. What certain active managers have now begun to do is subscribe to GBTC at NAV, short BTC, hold the structure for 6 months until lockups come up, unwind, and collect the spread.
We estimate that, given BTC borrow lend costs in the range of 10%, trading/holding fees of 1-2%, and management fees on GBTC of 2%, this trade would return net returns of about 6 to 8%. The trade carries little risk beyond counterparty/custody risk to Grayscale and wherever the short BTC position is held.
It’s uncertain what the impact of this trade will have on the actual premium overtime, but with USD all but free over a 6-month period, the trade appears without a doubt to be positive expected value. However, we'd argue that there are far simpler and higher-yielding trades in the space. To name a few, USD lending rates on Bitfinex have been consistently in the range of 25% annualized over the last 2 weeks and were well over 100% annualized during the aggressive run-up in the fall. Furthermore, even cash and carry trades in BTC-settled markets have yielded well over 100% during rallies when the space was re-rated.
Ultimately, while the “GBTC arbitrage” appears to be positive expected value, there are plenty of higher-yielding trades with similar, if not reduced, risk profiles in the crypto landscape.