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Comment by Thorrez | Hacker News Reader

>Regardless of whether it contributed to their decision to disallow redemptions, it's an undeniable fact that not having a redemption mechanism was very lucrative for Grayscale until 2021 because it allowed the premium to remain in place.

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.

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I think if it were an ETF, which it isn't, then a "redemption" would mean someone could buy a large amount of bitcoin and trade it for a set amount of GBTC shares.

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.

Creation/redemption is the fundamental mechanism that keeps ETF prices in line with their constituents. How it works for a normal ETF is there is a group of participating brokers (basically all the big banks usually) who have the right to create units by handing in the constituents of the basket and the corresponding right to redeem units for the constituents. This keeps the price within some bounds.

>someone could buy a large amount of bitcoin and trade it for a set amount of GBTC shares.

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).

This article is like a rehashing/transcription of the recent Odd Lots podcast episode, seems like the author didn’t really understand it either.

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.

> 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

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.

I'm talking about the current situation where it's trading at a discount. The trust could push the price up to NAV if they want to but it will eat into their future profits.

Yeah, we're talking about different things. My original comment was about how the article doesn't make sense when it says that not supporting redemptions would make the premium more likely to continue. And I still think that part of the article doesn't make sense.

It’s because someone could short (borrow) GBTC and redeem it for BTC for an immediate profit. The premium would disappear near instantaneously as short sellers captured the spread.

Why would you redeem it for BTC instead of selling it on the stock market? If you sell it on the market you get 10%-50% more than if you redeem it then sell the bitcoins.

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.

GBTC is a form of "locked bitcoin," and it currently trades at a discount to the equivalent amount of ordinary bitcoin. If redemption were possible, the profitable arbitrage trade would be:

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.

Yes, when it's at a discount, redemption is useful.

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.

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