Did Grayscale’s GBTC Sell-off Lead to the Bitcoin Crash?

Has the near complete elimination of the 50% discount on Grayscale’s GBTC erased the potential for significant profits from selling?
(Previous summary:
SEC Commissioner Crenshaw, who voted against Bitcoin spot ETF, explains his reasons for opposition
)
(Background:
Vanguard refuses to sell cryptocurrency products, including Bitcoin futures ETF
)
Following the approval of the Bitcoin spot ETF by the SEC this week, the price of Bitcoin has fluctuated. After the approval, it reached a peak of over $48,000, but then fell steadily. It went through a period of consolidation around $46,000 before dropping to a low of below $42,000. It is now stabilizing around $43,000, with a 7-day decline of 1.69%.
According to Yahoo Finance, on the first day of trading, the Bitcoin spot ETF had a trading volume of $4.6 billion, and on the second day, the total trading volume reached $3.1 billion, with a cumulative total of nearly $7.7 billion. Among the newly launched Bitcoin spot funds, BlackRock led with a trading volume of $564 million on Friday, while Fidelity had a trading volume of $431 million.
However, both of these volumes are still lower than Grayscale’s GBTC. On Thursday, GBTC had a trading volume of $2.29 billion, and on Friday, it was $1.83 billion, accounting for more than half of the total trading volume.
According to statistics from BitMEX Research, on the second day of trading of the Bitcoin spot ETF, GBTC had a net outflow of $484 million, and the total net outflow of GBTC in the first two days was $579 million.
What is the relationship between the previous discount on GBTC and the current situation?
From the data, it can be seen that the previous discount on GBTC has almost disappeared since the trust was converted into an ETF. In December 2022, the discount reached 50%, but it has gradually decreased with the market recovery and the expectation of the ETF. On Monday, the discount had already shrunk to 5.6%.
Why is this? This requires an explanation of the differences in the structure of trusts and ETFs.
Trusts, such as the previous GBTC, are closed-end, which means that a fixed number of shares are issued at the time of the IPO, and these shares are then traded on the secondary market. Once issued, the number of trust shares cannot be increased or decreased according to market demand. Therefore, the market price of the trust is mainly determined by the supply and demand relationship between buyers and sellers, which may result in a significant difference between the market price and the actual value of the assets it holds (i.e., net asset value, NAV). If the market demand for the trust decreases, its market price may be lower than the NAV, resulting in a discount.
ETFs are open-end and allow authorized participants (APs) to create or redeem ETF shares when needed. These authorized participants can exchange cash or assets of corresponding value with the ETF manager to create new ETF shares or redeem ETF shares to obtain cash or assets of corresponding value, based on the market demand for ETF shares. This flexible share creation and redemption mechanism ensures that the market price of ETFs is usually closely related to their NAV. For example, if the trading price of ETF shares on the market is lower than the NAV, authorized participants can purchase these undervalued shares and redeem them for assets of corresponding value. This operation not only brings profits to authorized participants but also helps to push up the market price of ETF shares, making it closer to their NAV.
So, purely from a price perspective, for investors seeking financial returns, it is a reasonable choice to sell when the price is high. This would lead to Grayscale selling Bitcoin to repay cash to those who sell GBTC shares.
Further reading:
Why did ETFs pass but Bitcoin plummet? Bloomberg analyst: Grayscale GBTC experienced a large outflow of funds and high management fees forced profit-taking
Did Grayscale really dump its holdings?
According to data from Arkham, there is no evidence of a dump. Currently, based on the marked Grayscale addresses, Grayscale holds approximately 617,000 Bitcoins, worth about $26.6 billion, with recent outflows totaling about $1.67 billion. This means that Grayscale has not been forced to sell most of its Bitcoins due to continuous selling of GBTC shares, and the amount sold still accounts for only a small portion.


Current holdings of Grayscale. Source: Arkham
However, the market sentiment has not eased. One possible argument is that Arkham may not record all of Grayscale’s addresses, and the recorded Grayscale addresses may not be accurate. Therefore, the statistics may have missed some BTC sales and transactions, meaning that the $1.67 billion sell-off may not be accurate.
There is also a more alarming argument that involves the issue of fees for all Bitcoin spot ETFs. Currently, according to Bloomberg analysts, Grayscale’s GBTC has the highest management fee among ETFs:


Current ETF management fees. Source: Bloomberg
As can be seen, the fees released by issuers such as Franklin and Bitwise are relatively low, while Grayscale’s fees are the highest, at around 1.5%. If investors are not willing to pay this 1.5% management fee, they can choose to sell GBTC shares and invest in other ETFs. However, since this ETF is cash redemption only, when selling GBTC shares, they can only be sold for US dollars and not Bitcoin. This would inevitably lead to selling pressure and a decrease in price.
This raises the argument held by many on Twitter: just because there is no sell-off now doesn’t mean there won’t be in the future. If more people in the future throw away GBTC shares and buy shares of other BTC products due to fee issues, and if the sell-off behavior leads to more people choosing to hold cash and wait due to the continuous decline in price, it cannot be ruled out that BTC may continue to decline to below $40,000.
Crypto KOL Neuner said that Bitcoin “may face a period of sell-off” because ” $25 billion is a significant amount, and even if only 20% is redeemed, it means there will be $5 billion in sales in the market.”


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