Since October, with the popularity of the Bitcoin market, Grayscale Fund has once again become the focus of attention. Labels such as “giant whale”, “compliance”, and “Wall Street” have always accompanied them. Many people think that Grayscale Fund is synonymous with “institutional investors entering the market.” Even in the first few weeks, when Grayscale was trading normally on working days, Bitcoin showed an upward trend; while on rest days, Bitcoin appeared to fall. Although this phenomenon has considerable coincidence factors, it is not It prevents everyone from viewing the Grayscale Fund as the “savior” of the Bitcoin market.
However, I recently watched “The Wolf of Wall Street” and one of the plots was impressive: when the legendary stockbroker played by Leonardo gave a pen to people around him and asked them to sell it to themselves At that time, ordinary people would only talk about a lot of the advantages of this pen, but his good buddy Brad said: “Do me a favor and write your name on a napkin.” By creating demand, people will willingly buy it. Stocks, this is an important reason why Leonard can become the “wolf of Wall Street”.
For this reason, I can’t help thinking of the Grayscale Fund. From another perspective: If we regard the Grayscale Fund as a kind of artificial demand, rather than a market supply, then some interesting conclusions will be drawn.
On the “gold content” of Grayscale Fund
When people talk about Grayscale Fund, it is often difficult to understand. Because it is not like an ordinary open-end fund, there are not only subscription, redemption, but also secondary market transactions. The reason is that although the Grayscale Fund is called a “trust investment fund”, it is actually a “castrated version” of an ETF fund.
At present, Grayscale Fund has released 9 trust funds with single assets (BTC, BCH, ETH, ETC, ZEN, LTC, XLM, XRP, ZEC). Take the GBTC fund as an example. Like all ETF funds, GBTC is also divided into two major markets:
The primary market is the issuance market. Investors can use BTC or cash to purchase GBTC shares; accordingly, investors can also exchange GBTC shares for BTC through the primary market, and GBTC shares will be cancelled immediately;
The secondary market is the trading market. Investors can trade their GBTC shares on the secondary market. The trading platform is OTCQX and the inquiry trading system is adopted.
However, there are still two differences between GBTC and traditional ETF funds:
First of all, since October 28, 2014, Grayscale Bitcoin Trust has suspended its redemption mechanism. Although the GBTC of Grayscale Fund has passed the regulatory approval, it still has not submitted a redemption plan to the SEC. ；
Secondly, in traditional ETF fund transactions, T+0 transactions can be realized between the primary and secondary markets, that is, the ETF fund shares purchased on the primary market on the same day can be sold on the secondary market on the same day; a basket redeemed by ETF funds The shares can also be sold on the secondary market on the same day; however, the current GBTC’s primary market subscription share can only be sold on the secondary market 6 months later.
Of course, we should also pay attention to GBTC’s secondary trading market-OTCQX.
Whenever investors mention the Grayscale Fund, they will involuntarily label it “higher”. The important reason is that the various funds under the Grayscale Fund can be traded on the US stock market.
After nearly 200 years of development in the US securities market, a multi-level capital market system has now been formed. According to the quality of company stocks and the degree of market openness, the U.S. capital market system is mainly divided into the following levels:
The first layer is the New York Stock Exchange, NASDAQ Global Select Market and NASDAQ National Market, with high listing standards, mainly for the national market for super multinational corporations;
The second layer is the Nasdaq Small Capital Market and the National Exchange. It is mainly a national market for high-tech companies and small and medium-sized American companies in the United States. The listing requirements are low, and it can meet innovations characterized by high risks and high growth. The listing requirements of large-scale enterprises, most Internet companies in China are listed on the market;
The third layer is the U.S. regional securities market, such as the Cincinnati Stock Exchange and the Philadelphia Stock Exchange. It is a market that mainly trades local corporate securities.
The fourth layer is the pink sheet market, and OTCQX belongs to the pink sheet market.
So what is the pink sheet market?
In the movie “The Wolf of Wall Street” there is such a segment: Leonardo lost his job after the stock market crash in 1987, for which he had to go to an “investor center” as a stock broker. However, this “investment center” is mainly engaged in the pink sheet market business (in the movie we can see those stock quotes printed on the pink sheets).
It should be emphasized that the US pink sheet market is not a stock exchange. Company stocks traded through the US pink sheet market do not need to bear any requirements, such as submitting financial reports to the US Securities and Exchange Commission (so we see that except for the GBTC and ETHE products approved by the SEC, Grayscale’s other trust fund products have not been submitted to The SEC submits a report, but it can still be traded on OTCQX). And these companies traded in the pink sheet market are often small companies with a few people holding shares. These companies are generally small in scale, with less income, and even bankrupt companies. Therefore, most of these companies do not comply with the New York Stock Exchange. Basic market requirements for US trading agencies.
Therefore, although there are some high-quality company stocks overseas (mainly depositary receipts) in this market, the vast majority of the market is “junk stocks” and “penny stocks” in the United States. For example, in the movie Leonardo promoted the stock of a “cutting-edge high-tech company” that “is about to obtain a radar detector license”, which is actually just a “family company” in a small, broken white house in the Midwest. , But it is also true that if Leonardo can successfully sell these stocks, he can get 50% commission.
Of course, although the pink sheet market is synonymous with “junk stocks” and “penny stocks,” the pink sheet market is also divided into three levels: OTC QX, OTC QB, and OTC Pink from high to low. Among them, the Grayscale Fund belongs to the OTCQX trading platform.
OTCQX is the highest-level trading market in the U.S. over-the-counter market. All companies trading stocks here must meet information disclosure, financial and management standards (these standards are not set by the SEC, but specified by the trading platform), and must Provide proof of support from a certified third-party investment bank or legal advisor.
Therefore, from the actual situation, Grayscale Fund is only a “castrated version” of ETF funds, and its trading platform is only the “third-rate platform” of the US financial market system, and its gold content is not high.
The “Money Empire” in the Grayscale
Through the above analysis, we may be curious, since the “gold content” of Grayscale Fund’s products is not high, why are so many investors flocking to it?
Perhaps many people will use the deceitful phrases of “convenience and safety” and “cost-effective order execution” on Grayscale’s official website to explain. Since small and medium investors will buy and keep encrypted digital currencies by themselves, wouldn’t institutional investors? Do institutional investors look for “compliance channels”? Obviously not, because CME has launched “BTC futures”, is there a big difference between the one-time leveraged BTC futures and the BTC spot? Perhaps the former one-year transaction fee for renewal is cheaper than the management fee of the Grayscale Fund, and it can also increase leverage and save capital costs as the position is closed.
Perhaps, for everyone who pays attention to the Grayscale Fund, the starting point for analyzing the problem may be wrong. The narrative logic of the public has always been: Because institutional investors are optimistic about the future prospects of Bitcoin, they only pass the Grayscale Fund. Purchased Bitcoin through compliance channels.
However, it is closer to the real situation: because grayscale funds are “profitable”, so institutional investors buy in large quantities. The “profitable” here has nothing to do with the future prospects of Bitcoin, but the product itself has arbitrage space.
The arbitrage space here mainly comes from the high premium that grayscale funds exist. Taking GBTC as an example, as shown in the figure below, the GBTC secondary market price is basically the same as the BTC price trend, but the GBTC secondary market price is much higher than the net value of GBTC, which has been maintained at about 20% for the past year.
For general ETF funds, there will be no high discounts or premiums because of the ETF’s arbitrage mechanism:
- When net value> market price, arbitrageurs will buy ETF fund shares in the secondary market, and then use ETF fund shares in the primary market to redeem the underlying assets (such as a basket of stocks or other assets) to earn the difference;
- When the market price> net value, arbitrageurs will use the underlying assets to subscribe for ETF fund shares in the primary market, and then sell ETF fund shares in the secondary market to earn the difference;
So why does the Grayscale Foundation have a high premium? The reason is that the grayscale fund we mentioned earlier is a “castrated version” of ETF funds. Because the redemption mechanism is cancelled and the position needs to be locked for 6 or 12 months, the arbitrage mechanism is not smooth, so there is a high premium. phenomenon.
If you return to the beginning of the article, Leonardo’s famous saying: By creating demand, people will willingly buy stocks. The same is true for grayscale funds, which artificially create high premiums to attract investors to buy grayscale funds. This is why investors favor Grayscale funds so much, it has nothing to do with Bitcoin itself.
Therefore, we have seen a rare scene of “standing and earning money” in the cryptocurrency market, which has not only won a good reputation, but also obtained a lot of money:
(1) Grayscale funds without a redemption mechanism can only buy BTC, but not sell, and permanently lock the position, which is conducive to the increase of BTC price; even if it is not purchased in kind, it will bring huge amounts of funds to the cryptocurrency market; Gold is fully borne by the traditional capital market and will not bring selling pressure to the cryptocurrency market.
(2) The redemption risk is the biggest concern for fund products, but gray funds without a redemption mechanism mean that they can “indefinitely” and charge a 3% annual fund management fee
Of course, this artificial demand not only brings huge benefits to the Grayscale Fund itself, but also brings high external effects to Genesis, which is also a subsidiary of the DGC Group.
Currently, Genesis mainly includes four major businesses: trading business, lending business, derivatives business and custody business. In addition to the newly opened custody, Genesis’s other three businesses can benefit from the recent rapid growth of Grayscale Fund.
The first is the trading business. The gray fund’s cash purchases in the primary market are all authorized to Genesis to buy BTC in the spot market.
Second is the lending business. Unlike other cryptocurrency lending platforms, Genesis can directly pledge GBTC/ETHE to borrow BTC/ETH. This means that investors can use the fund shares in their hands for borrowing, and then apply to purchase fund shares, in order to amplify leverage and expand returns. As long as the high premium in the secondary market is greater than the additional costs such as the gray fund’s management fees and borrowing interest rates, then arbitrage will occur. Similarly, we can observe that since the second half of this year, with the continuous expansion of the gray scale fund, the scale of Genesis’s lending business has also expanded rapidly, and the growth rate of cumulative loan issuance has increased significantly.
Finally, there is the derivatives business, which is often overlooked by everyone. At present, investors in the cryptocurrency market generally have a misunderstanding: This part of the high premium can be used to realize arbitrage through cash/cryptocurrency. The rough method is to borrow cash/cryptocurrency from the lending platform, and then subscribe to the gray-scale Bitcoin trust share. After the 6-month lock-up period expires, the trust shares will be sold through OTCQX. If there is a positive premium, the remaining part after returning the principal and interest of the lender is the profit of the arbitrageur.
However, the risk of the above arbitrage scheme is great, because it does not eliminate the price risk of Bitcoin itself. For example, Bitcoin fell by 30% in a month, but GBTC has always had a high premium of 20%. Even so, investors are losing money. Therefore, for institutional investors, in addition to the above arbitrage operations, they also need to sell corresponding cryptocurrency short positions in the derivatives market (such as CME and Genesis’s derivatives business) to hedge risks.
According to Genesis’s financial report for the third quarter of this year, its derivatives business has become one of the fastest-growing businesses, reaching US$1 billion in the third quarter. The main reason is that Genesis’ lending business customers need to use derivative products for hedging. To reduce investment risk.
Similarly, according to the financial report submitted by the Grayscale Fund to the SEC, the fund’s fund of funds holds at least 1% of Coinbase’s shares, and the related encrypted assets of the Grayscale Fund are managed by Coinbase and charge custody fees.
It can be seen from the above that Grayscale Fund brings more than just 3% management fee income, but expands the business map of DCG Group. Through the creation of a set of profitable products of “high fund premium”, Genesis has strengthened its trading, lending and derivatives business, formed DCG Group’s unique “gray fund moat” and created a “money empire” in the cryptocurrency market.
