Grayscale’s Bitcoin Trust ETF (NYSE: GBTC), a popular vehicle for both institutional and retail investors to gain exposure to Bitcoin without directly owning the cryptocurrency, has recently experienced significant market turbulence. As of now, it manages an impressive $21.1 billion in assets under management (AUM) which was $28.58 billion on 10th Jan 2024

Before it transitioned to an ETF, GBTC operated as a trust, acting like a piggy bank for Bitcoin. Major investors deposited funds into GBTC, which then used that capital to purchase Bitcoin. The trust retained the Bitcoin and allowed investors to buy and sell shares representing a portion of the cryptocurrency. As Bitcoin’s price fluctuated, so did the value of these shares.

Now as an ETF, GBTC functions differently. Authorized participants, special market players, can create or redeem ETF shares. This mechanism helps maintain the correlation between GBTC share prices and the price of Bitcoin. If GBTC shares become more expensive than Bitcoin, authorized participants can create more shares to bring the price down. Conversely, if GBTC shares are priced lower than Bitcoin, they can redeem shares to push the price up.

The story of the GBTC ETF begins on January 10, 2024, when the long-awaited Bitcoin Spot ETFs were finally approved by the SEC. This was a monumental event that widened access to both retail and institutional investors, legitimized Bitcoin as an asset, and set a precedent for high-profile ETFs.

Just a day later, on January 11, GBTC shares commenced trading on NYSE Arca. This was a significant milestone for GBTC, which had been a popular vehicle for investors to gain exposure to Bitcoin without directly owning the cryptocurrency. The value of FTX’s holdings in GBTC rose to approximately $900 million.

The Capital Outflow

A swift change followed the launch of the Bitcoin Spot ETFs in the market dynamics. GBTC, which had an initial AUM of $28.8 billion, experienced a significant reduction in its funds approximately 26.74% of its total funds, reducing its AUM to $21.1 billion. This large-scale withdrawal necessitated the sale of a substantial portion of its Bitcoin reserves, leading to increased market volatility. Despite this, the continued interest in Spot ETFs suggests a potential rebound in the cryptocurrency investment landscape. 

The outflows from GBTC had a direct impact on Bitcoin reserves, as Grayscale had to liquidate a part of its holdings to fulfill redemptions. This action played a role in the market volatility observed in the trading sessions that followed. However, the ongoing interest in Spot ETFs could offset these market dynamics.

The FTX Liquidation

A lot of GBTC shares were sold off by the estate of the now-defunct cryptocurrency exchange FTX and the hedge fund Alameda Research, which made the market even more unstable. This liquidation, which took place at the beginning of spot ETF trading, is believed to have raised at least $600 million. Before January 11, when the trust was turned into a spot exchange-traded fund (ETF), the FTX estate owned 22.28 million shares of the Grayscale Bitcoin Trust, which were worth $902 million at the time.

FTX liquidated “more than two-thirds” of its shares in the three trading days that followed, suggesting that it now holds fewer than 8 million shares, with an approximate value of $281 million.

The Lawsuit and Redemption Ban

Before the conversion of the trust into a spot ETF, Alameda Research had sued Grayscale for what it considered to be exorbitant fees. As part of the lawsuit, Alameda said Grayscale was putting in place a “self-imposed redemption ban” that stopped shareholders from buying the Bitcoin that the trust owned. Most investors had yet to redeem their shares for the trust’s underlying Bitcoin before Jan. 11, and the trust’s share price was 44% below that of the Bitcoin it represented as of June 15.

However, redemptions for authorized participants were opened on Jan. 11 after the United States Securities and Exchange Commission approved the Grayscale Trust to be converted into an ETF. As the expected date of approval drew closer, the GBTC shares’ discount versus net asset value fell to 1.55%, according to data from YCharts. 

This made the price of these shares more closely align with the value of the Bitcoin they represented. GBTC is now only 0.27% below its net asset value per share.

Conclusion

More than $700 million of Bitcoin has been sold by the Grayscale Bitcoin Trust since Jan. 11, with some analysts claiming that investors are fleeing the fund because of what they see as high fees. On Jan. 22, Alameda dropped its lawsuit against Grayscale. Despite these challenges, GBTC is now only 0.27% below its net asset value per share, indicating a potential stabilization in the market.