Is grayscale’s big GBTC unlocking a threat to Bitcoin?

Bitcoin prices are slightly under pressure in the $30,000-$40,000 area as the traders are preparing themselves for the $16,000 BTC worth of GBTC share unlocking in July. It is a topic of hot debate among the analysts at the moment, if probable sell-off share connected to a multi-billion-dollar Bitcoin (BTC) investment fund could bring down the cryptocurrency’s spot prices? 

All of this heated argument is narrowed down to Grayscale Bitcoin trust, the worlds largest digital assets manager which allows institutional investors to achieve indirect exposure in the Bitcoin market through its product, GBTC. The investors buy the GBTC shares directly through Grayscale in daily private placements by paying in either Bitcoin or the U.S dollar. Then investors are only capable of selling their GBTC shares after a six-month lockup period in secondary markets to other parties. Hence, they look forward to liquidating at a premium when the market price at the time of sale goes above the native asset value (NAV). One another factor that we can’t miss is that, while liquidating GBTC shares if the market price has gone below the NAV will surely bring losses. So, if investors plan on getting rid of their GBTC holdings, they would have to do it for the sake of financial casualty and also due to the fact that the share has been trading at a discount i.e., under its NAV since February 24,2021. 

According to some analyst, including strategists at JPMorgan, the accredited investors will try to sell at least a portion of their GBTC holdings soon after the July unlocking period by contemplating further on the ongoing Bitcoin market downtrend. “Despite this week’s correction, we are reluctant to abandon our negative outlook for Bitcoin and Crypto markets more generally. So, despite some improvement, our signals remain overall bearish,” said Nikolas Panigirtzoglou, the lead strategist at JPMorgan. However, there are other analysts who believe that this event will drive out sellers from the market in July, opening up with both transient and bullish capabilities to break new all-time high records. 

When asked if it’s the Bitcoin price inter-related to Grayscale the reason for unlock dates? Panigirtzoglou says, it is the GBTC shares which were taken up by investors at around 40% premium in December2020. The month witnessed Grayscale Bitcoin Trust attractive inflows of $2 billion, followed by $1.7 billion in January. Which indicates that around 140,000 Bitcoin worth of shares will get unlocked by the end of July. At least 139,000 Bitcoin have already been released between mid-April to mid-June, which is a specific period colliding with spot BTC/USD’s crash from around $65,000 to as low as $28,000. Based on the observation of Lyn Alden, the founder of Lyn Alden Investment, the relation between the spot Bitcoin price crash and its Grayscale’s GBTC unlocking periods could happen again as more and more shares get unlocked in July. Alden also pointed out how the correlation is a sub normality of Grayscale’s “neutral arbitrage trade.” 

In the arbitrage trade, there are institutional investors like hedge funds who borrow Bitcoin to buy GBTC shares. Then soon after the lock-up expires, these same investors will sell GBTC shares to secondary markets to retail investors, mostly for a premium. Then at last they will return the borrowed Bitcoin to their lenders and take the extra money made. “Part of the run-up in the second half of 2020 was due to the Grayscale neutral arbitrage trade, sucking in a ton of Bitcoin,” Alden tweeted. “When ETF’s and other new ways to access bitcoin made GBTC less unique, the premium went away. So, the neutral arb trade went away.” 

David Lifchitz of ExoAlpha, arbitrage strategy trade might have been a reason, but it didn’t cause the Bitcoin price plunge. The chief investement officer came to know that the original GBTC arbitrage trade strategy was made for investors with money to burn. This is mostly due to the fact that they would need to hold the short Bitcoin position during the GBTC lockup period and the additional time costs would risk offsetting the difference that was for arbitrage. “and for the simple buyers of GBTC shares at a discount vs. BTC who didn’t sell short BTC against, their profit depends on the price at which they bought GBTC: if they bought between $40k and $60k, they are in the red today…and may not want to sell just yet and lock-in their loss,” he said. The chief executive of Grayscale Michael Sonnenshein said that investors would buy the GBTC shares with a medium-to-long-term outlook. So, they wouldn’t have to throw away their holdings as soon as its unlocking is done. “I would generally say that investors certainly are going to think about where the price of the shares is, relative to net asset value or relative to Bitcoin before they would think about getting any liquidity.” He spoke.