The free money machine that went into reverse: Grayscale Bitcoin Trust
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1. GBTC was set up to allow people, who did not want to set up a cold storage, exchange or similar crypto mechanisms to buy a BTC proxy by buying shares of GBTC, which would buy the corresponding amount of Bitcoin. It was convenient, other options were difficult, crypto was hot, so GBTC traded, on a secondary market, with a premium to the underlying BTC it held. It also charged noticeable fees (which also allowed the company to operate without FTX style financing).
2. Where there is a price mismatch, there is arbitration. Sophisticated teams did leveraged arbitration on BTC vs GBTC and got a lot of money out of thin air. But all schemas like this work until they do not. At some point, GBTC premium on the secondary market turned into discount and people doing arbitration lost lots of money. I cannot shed too many tears for them: investment is risky and those were very sophisticated investors who had to know that arbitrage sometimes flips. Win some, lose some.
3. All that does not mean that people who invested in GBTC (bought shares through their traditional brokerages) got swindled, FTX style. GBTC still trades on secondary market. Any broker would be happy to let you buy or sell it. Like any closed-end mutual fund, its price may be higher or lower than underlying, which adds a little extra volatility (but nothing compared to the volatility of the underlying Bitcoin). But folks who decided they do not want GBTC can sell anytime and get dollars back.
4. It is useful to keep timeline in mind. If there is any whiff of the exchange or trader insolvency, people will pull the money in the matter of days; more likely hours and minutes. GBTC went from premium to discount about 1.5 years ago. If I wanted BTC today I would not buy GBTC; it is, says me, not the best option. However, I do not think it is going to collapse due to a fraudulent activity or creative financing. My 2c.
The discount doesn't matter so much to that. If the discount rate stays constant, then GBTC is an equally good investment as any other exposure to bitcoin - when BTC rises 50%, GBTC will also rise 50%.
However, the discount rate is not constant. It was a premium a year ago (+10% ish), and now it is a discount (-50%).
GBTC goes up and down based off of rumors of Gemini bankruptcy. Genesis will skyrocket if the bankruptcy rumors turn out false. Otherwise, GBTC may further collapse.
Say that your position is that only arbitraging between GBTC and GBTC on different exchanges is really arbitrage. Well, what if that doesn't converge? There has to be a difference in the first place, and some uncertainty.
So if "exactly the same product" doesn't converge, then you can say that it isn't exactly the same after all.
Which means that the definition of "same", however you choose, must be a bit arbitrary.
Definitions are arbitrary, but I think there are objectively bad definitions, which are so flexible that they can include or exclude everything or that definitely do include or exclude everything.
Assuming exchange withdrawals and deposits are open (and putting aside that you technically have a claim to withdraw, not a coin in your own wallet), it doesn't matter what happens to the price gap because you withdraw the coin that you purchased and deposit to close your short.
When a crypto exchange has withdrawal/deposit issues, you do see prices on that exchange start diverging, because coin X on said exchange stops being fungible with the rest of the world.
I think you misread me? My claim is that the Gbtc trade Carrie’s plenty of risk, much then anything that would be appropriately described as an arbitrage.
You’re exactly right about arbitrages, which is why arbitrages tend to go away very fast and/or are extremely competitive (latency arbitrage is an example).
Gbtc redemption was somewhere between difficult to impossible over history, so it’s not really an arbitrage in the same way that an etf and its constituents are.
You have an implied bet that you’ll be able to sell the gbtc at an even higher premium or eventually redeem it at some premium that makes borrow costs worthwhile. Neither of these are risk free and borrow is very expensive, many firms learned this the hard way
Sure the arbitrage can remain indefinitely. Everything is an arbitrage. A company is buying people's time and selling a product. They are basically engaged in a sophisticated arbitrage.
Financial arbitrage in open market are short-lived because deep pocketed investors can quickly close the gap. The arbitrage might be still there but it's not visible to the average guy. (There is a lot of arbitrage going on in Crypto exchanges; however, it's quickly collected by big boys bots; but that doesn't mean the arb doesn't exist).
This part doesn't make sense and makes me think the article is just random blurb.
If you shorted GBTC and bought BTC during the premium and held until this point: You'll be profitable to your neck. Actually, you'll drown in profit. Not only you collected the premium but also now you get to collect the discount.
Of course, someone might have mismanaged the trade. That's trading: It's not about "predicting" the outcome, it's more about managing the money flow.
But the trade was profitable. It still is. The arbitrage is there if you are patient.
Also doesn't mention that Gemini was marketing the 'earn' program using deceptive marketing that compared it to a savings account. It also seems to imply that most of the earn money was going into the GBTC arb, but really earn's promotion had scaled up after the arb was mostly dead. GBTC went into discount Feb 25th 2021 and has been since, It looks like I became aware of and started sending complaints about Earn sometime around November 2021. The first message in my email mentioning it, spam from Gemini, was on October 16th 2021: "Did you know you could be earning up to 7.4% APY on your crypto with Gemini Earn?". By that point GBTC was trading at a substantial (>15%) discount, so the arb was dead.
Edit: initial announcement of Earn was https://www.prnewswire.com/news-releases/gemini-launches-gem... Feb 2nd 2021, so I think it's unlikely that more than a trivial amount of the earn funds went into the GBTC arb.
AFAICT earn money was going into (companies that gambled on) "defi" ponzi schemes, it's just that genesis really got screwed at a massive scale because of the GBTC loans and connected defaults.
The yield curves just don’t math Greg sir
The network or the protocol can reliably pay interest.
A company investing all the money and just betting on time value of money x time and calling it a business plan in crypto land is not a plan. You will lose every time.
There’s no business plan to generate the interest payments reliably over time on most of these crypto lending programs - if the yield curve doesn’t flatten over time welcome to someone’s Ponzi scheme.
Interestingly, when the premium became discount in Q1 2021, it was roughly 6 months later that BTC was at its ATH. In hindsight, this was one of the best signal available.
I don't understand that. It was trading at a premium. Why would anyone do a redemption if it's trading at a premium? I don't see how a lack of redemption ability would make it more likely to trade at a premium.
I'm not sure why someone would frame "not having a redemption mechanism" as a choice by Greyscale to inflate the price - it's occurred to many people to make a crypto ETF for more accurate prices, and I vaguely thought that Greyscale in particular had been trying.
They allowed that (with a 6 month delay) (until March 2021 when they stopped allowing it). That's basically what the entire article is about.
Redemption is going in the opposite direction. And they didn't allow that (well, they did allow it, but stopped in 2014).
Also, I don't see how shorting gives you immediate profit. You still have to give back the stock later (you're in debt). If the stock goes up, you lose. If the stock goes down, you gain. I don't see how it's immediate profit.
1. Use cash to buy Y GBTC at $X 2. Redeem those GBTC for Y bitcoin. 3. Sell those bitcoin for $Z > $X
Short selling isn't necessary, but it would sidestep the "use cash" part of step 1.
This trade is not currently possible because GBTC does not allow people to trade in GBTC shares for the equivalent bitcoin.
But the quote I was quoting was only talking about when it was trading at a premium. That's when I don't see how redemption could be useful.
The argument there was that the trust could start selling the BTC and buying back their own shares to pocket the difference but that would be a one time profit. By keeping the BTC in there they can keep getting their fees year after year.
That wouldn't be a profit. That would be a loss. Since it was trading at a premium, buying shares is going to cost more than they get from selling the BTC.
Total btc market cap still 450bn and total crypto market cap still 1 trillion. And it would be really myopic to say financial arb formed the foundations of “much” of the crypto industry.
So Bitcoin is the tech. You mine it, buy it, sell it, spend it, whatever. The Bitcoin price is what it is, it goes up and down.
The industry are the financial instruments - derivatives if you like - of the tech. So no longer nitcoin, but rather shares in a company holding Bitcoin. Or exchanges where you deposit your Bitcoin etc.
Most of industry offers a service, providing things not easily done with your Bitcoin sitting in your wallet at home. For this service they take a fee. This is the arbitrage in question, and since pretty much all financial companies, not just crypto, leverage this "Access for a Fee" (AfaF) approach, in a sense arbitrage is the root of the "financial industry" (not just crypto)
Not surprisingly riles and regulations happened to traditional finance companies. An effort has been made to protect the investor, or at least allow them some expectation of honesty.
By contrast the crypto world is a mix of honesty and dishonesty, and its hard right now to tell one from the other. The various implosions over the last year or so, some clearly dishonest, does the industry as a whole no favours.
I say this as an outsider looking in.
I'm not an expert on crypto, and found your comment particularly insightful.
Of course an arbitrage doesn't last forever in a working market. People speculate against it, because there is money to be made. That's how the free market is supposed to work.
As Morningstar points out, Grayscale has the power to make this right. It can redeem shares at NAV and simply return investors their cash or bitcoin. That is, if Grayscale really does care about crypto investors.
Grayscale offered a redemption program before 2016. However, the SEC issued a cease and desist order because the repurchases took place at the same time the trust was issuing new shares, in violation of Regulation M.
The situation is different now. Grayscale stopped issuing new shares in March 2021. That leaves the door open for it to pursue a redemption program and bring GBTC closer inline with the price of bitcoin.[1]
The key concept here is that if you're an issuer, you usually can't buy and sell your own issued stuff. (FTX did a lot of that. It didn't end well.) But Greyscale is done issuing. They can now redeem their own fund shares if they want. Or just liquidate the whole fund and return the assets to the holders. If they actually have all the assets.
[1] https://amycastor.com/2022/04/19/welcome-to-grayscales-hotel...
Then why are there ETFs anyway?
[1] https://www.ssga.com/au/en_gb/institutional/etfs/resources/e...
I don't understand what the concern is here. Without an arbitrage mechanism, of course the peg is lost. As a counter-example, USDC allows both new issuances and redeems (it's not a trust but it's conceptually similar). ETFs also allow this mechanism to operate.
FWIW, I don't know why GBT hasn't re-enabled redeems if they're now allowed to do so. I was just going from what I read in the article.
PS: What ended badly at FTX is that they gambled with / stole customers' deposits, it's not really a comparable concept.
Because they'd have to pay out money. Money they might not have.
That's like signing a massive import deal with Ferrero for Kinder Surprises, knowing that you'll make a killing as soon as the regulations are changed to allow you to bring them into the US. And then blaming regulators for not changing the rules that already existed to suit you.
Anyone trying to blame this on regulators is lying to you.