Thread by @AllenAu11

1/ Another misunderstood item of Grayscale Bitcoin Trust ($GBTC) is its premium, which can be considered simply as the amount one is willing to pay to not custody their own private keys and still get exposure to #Bitcoin. However, it is more than that.

2/ When you buy $GBTC, you are not buying #Bitcoin, but only exposure to the crypto king. $GBTC is a trust product solely invested in $BTC offered by Grayscale Investments in the form of shares that are traded publicly in the secondary market, OTCQX Best marketplace, in the US.

3/ $GBTC is popular among institutional investors because it allows them to expose to #Bitcoin and bypass uncertainty related to regulation, compliance, and taxation. For retail investors, it is the only investment vehicle available through tax-advantaged accounts such as 401(k).

4/ New $GBTC shares are only created in private placements to accredited investors who meet certain minimum income and net worth requirements. $GBTC has neither a regular share issuance nor redemption process (no $BTC can be redeemed when you sell your $GBTC shares).

5/ $GBTC is governed by The US Securities Act Rule 144 which provides an exemption that allows accredited investors to sell their $GBTC shares in the secondary market after holding them for 6 months.

6/ $GBTC may trade above or below its underlying net asset value (NAV). When it trades above its NAV, a premium to its NAV exists. On the contrary, a discount to NAV exists if it trades below its NAV. The premium or discount is dictated primarily by market forces.

7/ $GBTC has traded with a premium for most of the time since it was offered to the public. The premium shows that retail investors are paying more for $GBTC shares than the underlying #Bitcoin held by $GBTC.

8/ This difference is caused by the inability of retail investors to purchase shares directly from Grayscale Investments. The 6-month lock up period whereby accredited investors cannot sell their $GBTC shares causes a supply shortage also contributes to the premium.

9/ The premium of $GBTC can rise continuously when there is demand for $GBTC and no new shares are created. The premium can be used as a leading indicator of the price of #Bitcoin.

Increasing premium = Bullish sentiment;
Decreasing premium = Bearish sentiment

10/ When the $GBTC premium is high, an arbitrage opportunity exists for accredited investors who can swap their $BTC for $GBTC shares at NAV and sell their $GBTC shares to capture the premium after the 6-month lock-up period and to repeat the process when their $BTC are released.

11/ With so much institutional money buying $GBTC, the premium of $GBTC will continue to stay high. But competition is coming to change this. Wilshire Phoenix has filed to the SEC in 6/2020 to launch the Bitcoin Commodity Trust with lower fees (0.9% v 2%) to challenge $GBTC.