GBTC unlock edges closer as impact on Bitcoin price remains unclear

Published at: July 10, 2021

As Bitcoin (BTC) struggles around the $32,700 mark after the July 8 price drop, another major event looms over the flagship cryptocurrency in July, the Grayscale Bitcoin Trust (GBTC) unlock.

A total of nearly 40,000 BTC will be unlocked in July, amounting to nearly $1.5 billion in notional value. The biggest of these unlocks will be on July 18 when 16,240 BTC will be available due to the release of the six-month lock-in period for GBTC shares.

The tranche of shares consists of positions locked in Q1 2021 with a notional value of around $530 million, making this the largest GBTC unlocking event to date.

Grayscale Investments is one of the largest institutional fund managers for digital currencies that allow institutional investors to gain exposure to Bitcoin’s price action through the GBTC shares.

At the time of writing, the GBTC fund holds 654,600 BTC tokens worth more than $21.56 billion. This amounts to 3.11% of Bitcoin’s maximum supply of 21 million tokens, making the fund the top destination for institutional investors to have exposure to BTC through a traditional exchange product. The GBTC shares are available on OTCQX, an over-the-counter platform owned by OTC Markets Group.

The GBTC share is currently trading in the $27 range, which is over 52% down from its all-time high of $58.22 on Feb. 19. The share tracks Bitcoin’s market price excluding any applicable fees and expenses. With a minimum capital requirement for an investment of $50,000, the shares are more suited for institutional investors that have access to such large sums of capital.

Is JPMorgan’s estimate flawed?

According to JPMorgan analysts, the unlocking event could pose a “downside risk” on BTC’s spot market in the ongoing bearish stint that BTC is currently witnessing. They further stated, “Selling of GBTC shares exiting the six-month lockup period during June and July has emerged as an additional headwind for bitcoin.”

However, a recent report from cryptocurrency exchange Kraken states that “market structure suggests that the unlock will not weigh materially on BTC spot markets anytime soon, if at all, like some have claimed.” Citing filings with the United States Securities and Exchange Commission, Kraken claims that most of the shares to be unlocked are owned by large institutions that purchased the GBTC shares with BTC to utilize the premium-to-net-asset value (NAV) that the shares traded at then.

Furthermore, it is likely that these investors shorted Bitcoin in futures markets to minimize any impact due to negative price movements in the BTC spot markets. Cointelegraph discussed the unlocking event with Shane Ai, who is responsible for product research and development of crypto derivatives at Bybit — a cryptocurrency derivatives exchange. He explained:

“The upcoming GBTC unlocks are a function of private placements done six months ago, when premiums to spot were closer to 30%. These trades were likely accompanied by a corresponding BTC short leg, and if anything, the unwinding of these BTC shorts would translate into buying pressure. What’s also different today is the absence of new private placements, thereby reducing potential fresh shorting of spot BTC.”

The GBTC premium is the difference between the value of the assets — i.e., Bitcoin — held by the trust in comparison with the market price of these holdings. This premium exists due to the institutional demand that drives the GBTC fund that offers a regulated, exchanged-traded method of gaining exposure to Bitcoin.

Kraken further states that institutional investors that attempted to arbitrage GBTC’s premium could even hold onto their GBTC shares instead of selling in the secondary market and keep their short positions as well. This would entail that there is no net selling of the token.

It is also possible that the investors sell their GBTC shares to cover their short positions, thus resulting in net buying of the token. However, both ways, the impact on spot prices may not be realized immediately as the market might expect.

Pete Huminston, the manager at Kraken Intelligence — the research department of the exchange — has downplayed the correlation between the two assets, saying, “Despite one being a single-asset fund of the other, BTC and GBTC are two distinct assets with different forces influencing their respective prices.” He went on to state that “the trading strategies commonly used by institutional investors leads us to conclude that the event could be mildly positive for the Bitcoin price.”

GBTC discount could become a premium

Prior to Feb. 23 of this year, the price difference between GBTC to the net asset value of BTC has always been a positive number — i.e., a premium. This premium hit an all-time high of 122.27% on June 6, 2017. However, since the end of February of this year, the premium was converted into a discount hitting an all-time low of -17.86% on May 16.

Sui Chung, CEO of CF Benchmarks — a Kraken subsidiary — told Cointelegraph about the meaning of this discount, stating, “A negative Grayscale Premium is not a sign that institutional interest in Bitcoin is weakening. On the contrary, it likely speaks to greater choice and enhanced market maturity in the cryptocurrency space.”

He also mentioned that the Grayscale premium has also shrunk because of the large number of alternative offerings such as Bitcoin exchange-traded funds (ETF). The increasing prominence of Canadian ETFs, such as Purpose and Evolve, have had a knock-on effect on the allure of the GBTC fund. Chung said, “Without that premium, accredited investors can no longer buy shares at the NAV and sell at a higher spot price post-lock-up.”

Cointelegraph discussed the GBTC discount with Adam Jones, senior editor at OKEx Insights — the research team at the cryptocurrency exchange:

“The goal is always to buy low and sell high. The GBTC premium became extremely high and was severely overbought — a result of intense demand and institutional interest. Now, interest has declined in line with the premium... but it may return once the unlockings are over and institutions look to gain exposure at a discount.”

He further explained that when the new supply ceases, the market could correct, as currently, it allows investors to get the opportunity to access Bitcoin’s price action at a 10%–20% discount. However, Ai is of the opinion that this discount is unlikely to turn into a premium unless the GBTC funds transition into becoming an ETF using a redemption mechanism.

As the biggest unlocking event on July 18 nears, Bitcoin seems to be hovering in a bearish manner near $32,000, causing a domino effect on the entire altcoin market. Since the unlock might not see major downside price movement, there are chances that the price will rebound into higher ranges, eventually having a net positive effect for the flagship token.