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GM everyone. This is 2036, the crypto newsletter that pays you đź’¸
One of the most BIZZARE events in crypto is also its most controversial.
It’s one of the reasons SEC Chairman Gary Gensler is getting absolutely grilled in Congress today:
US crypto funds are trading at nearly a 50% discount to the value of their holdings.
Some people see it as an opportunity, others as a tragedy.
Let’s take a look.
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If you thought holding crypto was painful in 2022, you’re in for a treat.
The Grayscale Bitcoin Trust (GBTC) is an investment fund that holds bitcoin.
For years, the fund traded at a premium to the value of its underlying bitcoin i.e. you were paying 10-30% more for your bitcoin when buying this fund.
But the fund takes care of everything for you. It buys, stores, and secures your bitcoin.
GBTC was like the bottle service of bitcoin
Remember, 20% of all bitcoin in existence has been lost, so GBTC was very popular with big institutions and hedge funds who couldn’t afford to fumble their bags.
In fact, ARK Invest, the investment fund of Cathie Wood - the most badass woman in finance - is still one of its largest shareholders.
Waiting for the bull market
Now the goal of GBTC was always to convert into an ETF when regulations allowed it.
This would:
lower its yearly fees (currently 2% per year)
close the premium/discount gap
But as you may know, the SEC has refused to allow a bitcoin ETF in the US. It’s bizarre. Crypto ETFs have been approved in Canada, Australia, Switzerland, Germany, and Brazil.
That’s one of the reasons SEC Chairman Gary Gensler is being questioned in Congress these days.
Because investors aren’t happy with the result.
Instead of trading at a 10-30% premium, GBTC is now trading at a 38% discount relative to the value of its underlying bitcoin.
And ETHE - its sister fund for Ethereum - is trading at a cool 47% discount to the value of the underlying ETH.
Now - this is both good news and bad news at the same time.
In a bear market, the discount steepens, and investors lose even more money than people who just hold bitcoin or ETH.
But in a bull market, the discount typically flips to become a premium and investors make out like bandits.
This year already, as crypto’s taking off, the discounts have narrowed:
GBTC has gone from a -48% to -36% discount today
ETHE has gone from a -59% to -47% discount today
a.k.a holding these funds this year was more profitable than holding bitcoin or Ether alone.
I see, I see
Now, we see 3 possible scenarios going forward:
a) if the SEC approves a bitcoin ETF in the US, the premium/discount gap closes immediately.
If it’s trading at a discount, investors make a lot of money. If it’s trading at a premium, they lose.
b) the bull market picks up steam, and the discounts on GBTC and ETHE flip to become premiums. Investors make $$$.
This is what’s happened this year already. Bitcoin’s up 74% YTD. GBTC is up 100%.
GBTC investors this year
c) we go back into a bear market, the ETF does not get approved until several years out, and the discounts on both GBTC and ETHE keep widening.
Investors lose $$$ - for a long time.
Of course, no one knows what’s going to happen. But if the discounts become premiums - or get eliminated alltogether with an ETF conversion - investors stand to make a lot of money.
And with the market up and Gary Gensler in Congress, we think the wind is blowing ever so gently in GBTC’s favor.
We could be totally wrong - and we’re not holding our breath for it.
But we’re keeping it on our radar.
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