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GBTC’s near $11 billion assets under management pose a risk in the bear market: UBS

The size of Grayscale’s Bitcoin Trust (GBTC) could pose a potential problem for the entire market — at least according to a UBS report. 

Grayscale’s Bitcoin Trust, which passively invests in bitcoin, holds over 633,000 of the coins, which at today’s prices equals nearly $11 billion and represents 3.3% of all coins mined.  The sheer size would "spell trouble for the entire market, as bitcoin still comprises more than 45% of the space ex stablecoins," UBS wrote. 

The bank’s analysis comes as questions swirl around the health of Grayscale’s parent, Digital Currency Group. Concerns first cropped up when DCG’s Genesis Global Capital said it had a $175 million exposure to FTX following the exchange’s collapse. Genesis has reportedly been looking to raise $1 billion or it may file for bankruptcy protection. There have also been reports of DCG putting cryptocurrency news site CoinDesk up for sale, and the New York Times said DCG hired Moelis & Company to explore options. 

One possible option mentioned by UBS was for DCG to tap into its GBTC investment.

DCG is the largest holder of GBTC shares with almost 10%, based on Bloomberg data. It could potentially decide to sell its holdings to raise cash, Ivan Kachkovski, a strategist at UBS wrote in a note.

"This stake is presently worth $600m, 12 times greater than the three-month average of the trust’s daily trading volume," he said.

Backing up a bit

Shares in Grayscales bitcoin and ether products don’t grant holders access to the underlying assets. Therefore, a disparity exists between these products’ trading prices and net asset value (NAV). This is known as the premium or the difference between the value of the underlying holdings and the market price of the assets. The premium flipped to a discount in 2021.

"The negative basis widened further recently when crypto prime broker Genesis—Grayscale’s sister company within Digital Currency Group —admitted a $175m exposure to the now-bankrupt FTX and suspended withdrawals from its high-yield deposit platform. It also warned of bankruptcy unless it gets $1b in new capital," the analyst wrote.

GBTC’s discount to NAV has widened throughout the week. The product is trading at a discount of -42.5% today, down from -40.54% on Monday, according to The Block’s data.

The discount to NAV of Grayscale’s other structured product, ETHE, reached an all-time low of -45.66%.

Your size is not Grayscale’s size

Grayscale’s size can be extremely problematic in a bear market, Kachkovski said. 

Any sale would widen the GBTC discount further but not necessarily affect the bitcoin price. However, if GBTC itself were liquidated, it could affect bitcoin — since fund rules stipulate investors must be paid out in cash. 

"We believe the sheer size of GBTC’s holdings—633k BTC, or 3.3% of all coins mined— would spell trouble for the entire market, as bitcoin still comprises more than 45% of the space, excluding stablecoins," the report read, while stressing that it still believes a liquidation remains unlikely. 

That’s because DCG nets $210 million from GBTC management fees. Crucially, the fee is levied irrespective of performance or discount to NAV. The fund’s other products, including ETHE, bring in a further $100 million per annum.

Hang in there

UBS also notes that language in SEC filings does not suggest that a shareholder vote could force the trust’s dissolution. "Otherwise, Grayscale only has to remain liquid and solvent to keep running the fund."

The investment bank’s final point against liquidation states that, while profitable, realizing the discount — by receiving the underlying bitcoin — would bring in circa $440 million at best.

That would be just a little more than two years of recurring annual income from the trust’s management fees. It would also assume all bitcoin were sold at the current price, around $17,000, which Kachkovski says seems unlikely.

While investors should be concerned about these outcomes, Kachkovski said there’s no need to panic — yet.

© 2022 The Block Crypto, Inc. All Rights Reserved. This article is provided for informational purposes only. It is not offered or intended to be used as legal, tax, investment, financial, or other advice.

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