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Getting lots more questions on why the Grayscale premium exists and why that is having a big impact on ETH. Expanding on it here.
The US has not approved a crypto ETF. Digital Currency Group recognized that void super early (back in 2013) and created Grayscale. https://twitter.com/Joshua_Frank_/status/1346189066568667138
Getting lots more questions on why the Grayscale premium exists and why that is having a big impact on ETH. Expanding on it here.
The US has not approved a crypto ETF. Digital Currency Group recognized that void super early (back in 2013) and created Grayscale. https://twitter.com/Joshua_Frank_/status/1346189066568667138
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Grayscale's products for accredited/ institutional investors enable them to get exposure to crypto through Investment Trusts that don't require the user to buy or store the underlying asset
For funds that don't want to touch crypto directly, this enables them to get exposure
Grayscale's products for accredited/ institutional investors enable them to get exposure to crypto through Investment Trusts that don't require the user to buy or store the underlying asset
For funds that don't want to touch crypto directly, this enables them to get exposure
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Many of these products are now listed on OTC markets, so any investor can buy them directly in their brokerage or retirement accounts.
An example is Grayscale Bitcoin Trust (GBTC), an investment trust that holds Bitcoin.
Many of these products are now listed on OTC markets, so any investor can buy them directly in their brokerage or retirement accounts.
An example is Grayscale Bitcoin Trust (GBTC), an investment trust that holds Bitcoin.
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But why do people talk about premiums and why does it matter?
Premiums are the difference between the underlying NAV of the funds (also known as the holdings per share) and the actual market price that it is traded at.
But why do people talk about premiums and why does it matter?
Premiums are the difference between the underlying NAV of the funds (also known as the holdings per share) and the actual market price that it is traded at.
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Each share of Grayscale's products represent a portion of a crypto. For GBTC there are 0.00094991 per share. So at current market prices that equates to $29.96 worth of Bitcoin for each share of GBTC.
However, GBTC is trading at $35.70 a share, a 19.15% premium.
Each share of Grayscale's products represent a portion of a crypto. For GBTC there are 0.00094991 per share. So at current market prices that equates to $29.96 worth of Bitcoin for each share of GBTC.
However, GBTC is trading at $35.70 a share, a 19.15% premium.
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In the case of many Grayscale products these premiums have been sustained and very significant. GBTC has been around for years and only on one day did it trade at a slight discount to the underlying holdings per share. It actively trades at a ~15-20% premium
In the case of many Grayscale products these premiums have been sustained and very significant. GBTC has been around for years and only on one day did it trade at a slight discount to the underlying holdings per share. It actively trades at a ~15-20% premium
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Why do premiums exist? A few reasons (not comprehensive):
- Grayscale makes it super easy for anyone to get exposure to crypto in their brokerage/retirement accounts
- Some investors may not understand that they are paying a premium
- Lock-up periods
Why do premiums exist? A few reasons (not comprehensive):
- Grayscale makes it super easy for anyone to get exposure to crypto in their brokerage/retirement accounts
- Some investors may not understand that they are paying a premium
- Lock-up periods
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How do some get exposure to the Grayscale products at the NAV (underlying value) - this is where institutional and accredited investors come in. They can buy the products at the NAV, but they are subject to a 6-12 month lock-up period (varies by product).
How do some get exposure to the Grayscale products at the NAV (underlying value) - this is where institutional and accredited investors come in. They can buy the products at the NAV, but they are subject to a 6-12 month lock-up period (varies by product).
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So these large investors can invest either assets in-kind (ex. BTC into GBTC) or can invest US dollars. But they must wait 6-12 months to receive those shares, which they can then sell like any other security - through their broker
So these large investors can invest either assets in-kind (ex. BTC into GBTC) or can invest US dollars. But they must wait 6-12 months to receive those shares, which they can then sell like any other security - through their broker
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In the case of many Grayscale products the premiums have been extremely significant, ETHE (the Ethereum product) has traded at a 100%+ premium to NAV for much of its existence.
In the case of many Grayscale products the premiums have been extremely significant, ETHE (the Ethereum product) has traded at a 100%+ premium to NAV for much of its existence.
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So as a large investor you have two options:
1. increase your returns if you are long a particular crypto -place your holdings in GBTC, for example, and then sell it a premium to the underlying value once the lock up ends.
So as a large investor you have two options:
1. increase your returns if you are long a particular crypto -place your holdings in GBTC, for example, and then sell it a premium to the underlying value once the lock up ends.
12/
2. Borrow the underlying asset. Ex. borrow ETH for ~8%/annum and invest that ETH in-kind into ETHE.
By doing this the large investor is betting that the premium on ETHE is going to be greater than the cost to borrow - so they are placing an arbitrage trade on the premium
2. Borrow the underlying asset. Ex. borrow ETH for ~8%/annum and invest that ETH in-kind into ETHE.
By doing this the large investor is betting that the premium on ETHE is going to be greater than the cost to borrow - so they are placing an arbitrage trade on the premium
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Once the lock-up period ends they hope to sell the ETHE shares at a premium (i.e. price of ETHE is significantly higher than the value of the held ETH) which is greater than the borrow rate plus the management fee charged by Grayscale. The difference is their profit
Once the lock-up period ends they hope to sell the ETHE shares at a premium (i.e. price of ETHE is significantly higher than the value of the held ETH) which is greater than the borrow rate plus the management fee charged by Grayscale. The difference is their profit
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Where does that take us to today and why does that matter for Ethereum?
Many large investors placed made this arb trade on ETHE - borrowing ETH and then purchasing shares of ETHE.
Where does that take us to today and why does that matter for Ethereum?
Many large investors placed made this arb trade on ETHE - borrowing ETH and then purchasing shares of ETHE.
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When many originally placed the trade ETHE had a lock-up period of 12 months, but this was reduced to 6. As a result, many of those investors that put money in before the lock-up period changed are receiving their shares this week (more specifically on Wednesday).
When many originally placed the trade ETHE had a lock-up period of 12 months, but this was reduced to 6. As a result, many of those investors that put money in before the lock-up period changed are receiving their shares this week (more specifically on Wednesday).
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A subset of large institutions were able to borrow shares of ETHE from their prime brokers yesterday and then sell those shares before the rest of the institutions/accredited investors received shares.
They sold those shares yesterday.
A subset of large institutions were able to borrow shares of ETHE from their prime brokers yesterday and then sell those shares before the rest of the institutions/accredited investors received shares.
They sold those shares yesterday.
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This is really apparent in the chart below - ETHE traded 27M shares yesterday, it had never traded more than 6M prior
This is really apparent in the chart below - ETHE traded 27M shares yesterday, it had never traded more than 6M prior
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This massive sell off of ETHE shares is why the price of ETHE fell by more than 20% yesterday despite ETH rising back over $1K.
ETHE falling while ETH rising = premium shrinking
YCharts hasn't updated data, but the premium has quickly fallen from over 100% to below 13%.
This massive sell off of ETHE shares is why the price of ETHE fell by more than 20% yesterday despite ETH rising back over $1K.
ETHE falling while ETH rising = premium shrinking
YCharts hasn't updated data, but the premium has quickly fallen from over 100% to below 13%.
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There was a much less significant number of shares outstanding previously which is likely why the premium was so high. However, it is important to note that GBTC continues to trade at more than a 19% premium even though more than $18B worth of BTC is held in the product.
There was a much less significant number of shares outstanding previously which is likely why the premium was so high. However, it is important to note that GBTC continues to trade at more than a 19% premium even though more than $18B worth of BTC is held in the product.
20/
Back to ETH
To close their trades these institutions had to buy back Ethereum to pay back lenders - this is likely part of the reason why we saw a massive spike in ETH's price and trading volume Sunday. This functions similarly to a short squeeze.
Back to ETH
To close their trades these institutions had to buy back Ethereum to pay back lenders - this is likely part of the reason why we saw a massive spike in ETH's price and trading volume Sunday. This functions similarly to a short squeeze.
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So effectively - institutions borrowed ETH and bought ETHE to capture the spread between the premium and borrow rate
Yesterday some large investors were able to sell - created buying pressure on ETH (raising price) and selling pressure on ETHE (collapsing premium)
So effectively - institutions borrowed ETH and bought ETHE to capture the spread between the premium and borrow rate
Yesterday some large investors were able to sell - created buying pressure on ETH (raising price) and selling pressure on ETHE (collapsing premium)
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But many accredited/institutional investors are still not receiving their shares until tomorrow.
Logically we would think they need to buy ETH to pay back the loans they borrowed and will likely sell ETHE, putting more pressure on premium.
i.e. bullish ETH, bearish ETHE
But many accredited/institutional investors are still not receiving their shares until tomorrow.
Logically we would think they need to buy ETH to pay back the loans they borrowed and will likely sell ETHE, putting more pressure on premium.
i.e. bullish ETH, bearish ETHE
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However, many of these investors likely marked their books with big profits on the trade, not expecting the premium to collapse so rapidly.
So it will be interesting to see how funds play this, whether they just take a loss (or much less profit than expected) or double down
However, many of these investors likely marked their books with big profits on the trade, not expecting the premium to collapse so rapidly.
So it will be interesting to see how funds play this, whether they just take a loss (or much less profit than expected) or double down
24/
If ETHE's premium collapses fast enough there might be an opportunity to buy at a discount to NAV. Wouldn't be surprised to see some funds doubling down on their positions actually buying ETHE on the open market if it trades at a discount or even a slight premium to NAV.
If ETHE's premium collapses fast enough there might be an opportunity to buy at a discount to NAV. Wouldn't be surprised to see some funds doubling down on their positions actually buying ETHE on the open market if it trades at a discount or even a slight premium to NAV.
25/
Apparently I can only write 25 tweets. Basically this could be bullish for ETH and create a buying opportunity on ETHE around NAV (which could trade at a big premium again).
Lots more thoughts, happy to expand later
Apparently I can only write 25 tweets. Basically this could be bullish for ETH and create a buying opportunity on ETHE around NAV (which could trade at a big premium again).
Lots more thoughts, happy to expand later
