Investment inflows to the world’s largest publicly traded Bitcoin investment trust are central to Bitcoin’s price (BTCUSD), according to a recent report by strategists at JPMorgan. The Grayscale Bitcoin Trust (GBTC), a Bitcoin holding company, has $ 13.1 billion of assets under management (AUM) and is valued at more than $ 18 billion in OTC markets.
- JPMorgan strategists say investor inflows into Bitcoin Grayscale Trust are “too large” for Bitcoin price correction.
- Grayscale Bitcoin Trust is a publicly traded statutory trust in OTC markets that has significant holdings of the cryptocurrency.
- The trust provides indirect exposure to Bitcoin, but investing in the trust comes with significant hurdles and risks.
JPMorgan’s strategists write that the inflows into GBTC “are too large to allow any unflinching position from momentum traders to generate ongoing negative price dynamics.” In other words, investor enthusiasm for GBTC shares is a determinant of Bitcoin’s price trajectory, and other Bitcoin traders do not have sufficient market share or Bitcoin holdings to influence a correction in the cryptocurrency’s price.
The extent to which GBTC influences Bitcoin prices (or vice versa) is difficult to gauge because there is little transparency to the Bitcoin ecosystem. The thin liquidity of the cryptocurrency markets also adds to the problem. What is certain, however, is that GBTC shares are benefiting from a rise in the price of Bitcoin, enabling it to buy more of the cryptocurrency for its holdings.
The price of Bitcoin has recently skyrocketed to new records on the back of macroeconomic instability and solid moves by institutional investors to explore or move into cryptocurrency markets. Analysts have forecast a price correction but have not specified a timeframe for the event.
What Is Bitcoin Grayscale Trust?
According to Bitcointreasuries.org, a site that tracks Bitcoin holdings for publicly traded trusts and investment companies, GBTC holds 572,644 Bitcoin, or approximately 50% of the 1,150,622 Bitcoin in circulation in these enterprises. About 18.6 million Bitcoin has been mined so far, and GBTC holds about 3.1% of the asset.
The trust company has reported an impressive range of statistics about investor inflows into its product since early this year. For example, its AUM jumped from $ 2 billion in December last year to $ 5.9 billion this August, before shooting up to the current figure of $ 13.1 billion. JPMorgan strategists estimate that GBTC is adding assets at a rapid clip of $ 1 billion a month.
For institutional investors and hedge funds, GBTC is a convenient vehicle for indirect exposure to a volatile asset, without incurring the associated costs like custody. They can move into Bitcoin trade when its price is on the rise and exit when it is falling.
For example, investment firm Guggenheim Partners has retained the right to invest up to 10% of one of its funds into GBTC. The arrangement has several increments for Guggenheim to benefit from the high price of Bitcoin and little disadvantage as it does not have to buy or own the cryptocurrency. The GBTC organization as a trust adds tax benefits to the Bitcoin trade.
However, those benefits come at a hefty premium to the price of Bitcoin. During the 2017 bull run in cryptocurrency prices, GBTC shares traded at a 100% premium to Bitcoin’s actual spot price in crypto exchanges. GBTC shares also often mimic the volatile price movements of its holding asset. This year alone, the trust’s share price is up 238% in OTC markets.
Finally, the trust’s complex settlement – its shares being created in private placement transactions in primary markets and subsequently traded in public OTC markets – means private investors can download their shares for a premium in public markets , regardless of the true value of the underlying asset. For example, if the trust creates fewer shares in the private market and demands skyrockets due to surging Bitcoin prices, then traders in the OTC market will have to pay unrealistic premiums to own Bitcoin through GBTC.