Yesterday, Arkham revealed that Grayscale Bitcoin Trust is the second largest Bitcoin holder in the world.
In fact, the on-chain investigation found more than 1,750 public addresses associated with Grayscale, each containing less than 1,000 BTC.
In total, the company would own almost 628,000 BTC with a total value of $16.1 billion.
This is in addition to nearly $5 billion in Ethereum (ETH) and several million dollars in LINK, MATIC, UNI, BAT and other cryptocurrencies.
The Grayscale Bitcoin Trust
The Grayscale Bitcoin Trust is not owned by Grayscale.
It is a trust owned by the shareholders, i.e. those who have bought its shares. More precisely, the shareholders own the trust, not the Bitcoins it is backed by. In fact, they cannot, for example, return the shares to redeem them for BTC.
Grayscale is the manager of the fund, and therefore the manager of the BTC that backs it.
In fact, it was Grayscale itself that bought the BTCs backed by the fund from the market.
Furthermore, the physical custody of these 628,000 BTCs is entrusted to Coinbase Custody Trust Company.
However, since the shareholders own the fund but not the underlying asset, it is actually the Grayscale Bitcoin Trust that owns these BTCs.
Grayscale’s official website actually confirms $16.1 billion as the fund’s assets under management, with more than 620 million shares issued. Each share represents 0.00090050 BTC, or 90,050 Satoshi.
Grayscale Bitcoin Trust is a fund listed on the OTCQX® under the symbol GBTC that allows you to take a position on the price movement of Bitcoin without having to buy BTC directly.
It functions in some ways similar to an ETF, and in fact Grayscale has applied to the SEC for approval to convert it into an ETF. It is possible that this approval will come by spring of next year.
The NAV discount
As GBTC shares are not redeemable, the only way to potentially get rid of them is to sell them. This will cause their market value to fall more than BTC during a bear market.
The Grayscale Bitcoin Trust was launched in September 2018, and as it was by far the only similar instrument on the markets at the time, it was initially very successful.
So successful, in fact, that the fund’s NAV (net asset value) was 35% higher than the market value of the underlying asset.
Until the start of the last big bull run, the NAV had remained consistently above the AUM, but as soon as the price of bitcoin took off, the AUM shot up and eventually surpassed the NAV.
In fact, as early as March 2021, GBTC’s NAV fell below its AUM, ending at -20% in October of that year.
The following year, with the onset of the bear market, things got worse, with the NAV falling to -49% in December 2022.
During 2023, the NAV recovered somewhat, but to date it is still 19% below AUM.
Currently, GBTC’s individual share price is around $18.6, with a total NAV of around $12.8 billion, compared to AUM of $16.1 billion.
The conversion of the Grayscale Bitcoin Trust into ETFs
The conversion to ETFs should reduce the difference between NAV and AUM. In fact, when the shares become redeemable, it will be possible to redeem them for a certain amount of BTC.
At that point, those who want to get rid of the GBTC shares they have bought will not be forced to sell them, perhaps at a lower value than the underlying BTC, but could return them in exchange for an equivalent value in BTC. This could effectively eliminate the gap between NAV and AUM.
In theory, it seems highly unlikely that the SEC would reject Grayscale’s application to convert its bitcoin trust into an ETF after the ruling a few weeks ago, and the discovery that all 628,000 BTC used as collateral are indeed on-chain is a good sign for shareholders.
However, the way forward is not yet certain, so we will have to wait for the instructions that will be published after the SEC’s eventual approval to see whether or not current owners of GBTC shares will actually be able to redeem them in exchange for BTC.