As you know, there has been a serious decline in the price of Bitcoin. There are already a lot of comments about this, which usually include technical analysis. However, the root causes of this decline are much more important. Of course, these main reasons are not the only ones. But to understand even one of them, it is necessary to know very technical information.
In order to explain the place of Grayscale company in this event, first of all, it is necessary to know what TRUST means. One of the ways any asset can be traded on the Exchange is by trading the shares of a TRUST holding that asset. Trusts are actually FONs… These funds hold a certain amount of that asset in their hands. People also buy and sell stocks of that fund in the stock market. While doing these transactions, they are actually buying and selling the asset held by that fund.
Of course, the share price of the Fund must be proportional to the price of the asset held by that fund. But it doesn’t have to be the same. Let’s say an asset has a price of $100 each and it holds 0.6 of that asset per TRUST share. Then the actual value of a share should be 100×0.6 = $60. We call it the NET ASSET VALUE (NAV). But here the stock isn’t necessarily $60. Sometimes it can be above 60, sometimes below. There are several reasons for this. For example, if that asset IS VERY HARD to buy and sell ITSELF, investors will more easily buy a share of the fund from the stock market.
This causes the share price to be higher than the NAV. Sometimes the share price may be lower than the NAV. If the fund is a type of fund that we call an ETF, then there are arbitrageurs in the market to close this gap. In other words, if the fund is an ETF-type fund, ARBITRACTORS sells the Fund’s share and buys the asset if the price of the fund is higher than the asset the fund holds. It closes the gap. Even if the price of the fund is lower than the asset the fund holds, it does the opposite.
So in ETFs, there is not much difference between the Fund’s share price and the NAV. But if the fund is not an ETF but a type of fund that we call CLOSED END FUND, then there are NO ARBITRACTORS, those who destroy the difference between the Fund’s share price and the asset price per share (ie NAV). That’s why there is a difference. Now, we can start to explain the movement in Bitcoin price in the light of this information. There is a TRUST, a CLOSED END FUND holding a large amount of Bitcoin. This fund is very, very big. The Fund Family is called GRAYSCALE.
Now let’s go to Grayscale’s home page first. As you can see, this family of funds says it allows you to easily own Bitcoin and some other Crypto assets by buying GRAYSCALE shares from the exchange instead of buying them yourself. In other words, Wallet, Crypto Exchange, No security risk… Of course, investors have shown serious demand for this fund in the past years for these promises. So what happened? Because the demand was so high, the fund’s stock was much more than the value of bitcoin per share (i.e. NAV). We call this a positive bonus. Of course, as I explained above, this difference remained there for a long time, as there was no arbitrage mechanism to compensate for this difference between the share price and the Bitcoin asset per share.
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Now it is necessary to click on the “products” button on the same website and select the Bitcoin Trust in this Fund family. As you can see, there is currently over $22 billion in investment in this fund: If you scroll down a bit, you will find detailed information about this fund. As you can see, one share of this fund (exchange code is GBTC) currently holds 0.000940385 Bitcoins. So if you buy one GBTC share, you are holding 0.000940385 Bitcoins in return. What makes sense? What makes sense is that one GBTC stock is the current Bitcoin price times 0.000940385. Here Bitcoin times 0.000940385 is what we call NAV. But as we said, the share price can be more or less than this product.
Here we come to the most important point: At the time of the establishment of the GBTC fund, it was very difficult to invest in Bitcoin, so people were ready to give a lot more money to a GBTC stock than to bitcoin per share. So GBTC share price was more than NAV. How much was it? In 2018, this premium increased to 60%. So people were willing to pay 60% more for a GBTC stock than Bitcoin per share. So how did this Fund get its Bitcoins? There it is! Seeing this positive premium, investors gave their Bitcoin to the Fund. The fund also gave GBTC shares to these investors, but there was one condition: 6 MONTHS LOCK condition…
That is, if an investor gave 1 Bitcoin to this fund, he would have the corresponding GBTC shares 6 months later. So why were investors giving their Bitcoin to this fund? There was a simple reason for this: They borrowed Bitcoin and then gave it to Grayscale. In return, they would get the GBTC stock they bought after 6 months, and if the chart continued, they would sell the GBTC stock to new investors with a positive premium. In other words, people would buy Bitcoin with borrowed money and give it to the Grayscale Fund to collect that positive premium. At the end of the month, they would buy GBTC shares, sell them expensively, pay off their debts and pocket the premium.
This went on for 2 years, but guess what happened in the last 6 months? GBTC share price fell below its corresponding Bitcoin. So now the premium was negative. Now let’s make an account: Today is July 8, 2021. 6 months ago, February 8, 5021. What is the Bitcoin price that day? About 38 thousand dollars.
At that time, Prim was also positive… Let’s say an investor went and borrowed 1000 BTC (as a Loan). This was $38 Million (38,000 times 1000) at that day’s price. Then he went and gave it to Grayscale. In exchange, he received 1000 BTC of GBTC shares.
Why did he do that? Because in FEBRUARY, GBTC share price was higher than the corresponding Bitcoin. This investor thought it would be the same 6 months later (i.e. today, July 8th). What was the amount of Bitcoin per GBTC share, we saw on the site 0.000940385… Then how many GBTC shares did an investor who gave 1000 Bitcoin deserve to buy after 6 months? 1000 / 0.000940385 = 1.063.399… Of course, the 0.000940385 multiplier here was different on February 8th.
Because this figure decreases every day due to the 2% annual management fee of the fund. But I don’t go into that detail. Anyway, the investor gave Grayscale on February 8, approximately 1 Million 63 thousand GBTC shares for 1000 BTC, 6 months later, that is today. He knew he would get it on July 8. He was happy because GBTC shares were being sold at 20-60% expensive…
On July 8, he was going to sell these 1.063.000 GBTC shares at 20-60% expensive, pocket the difference, buy 1000 BTC from the market with the rest and pay back the BTCs he took as loans. But things didn’t go as expected, guess what? GBTC shares began to be traded under NAV, not above. So the premium was Negative.
Now those big investors were burned. 6 months ago, they borrowed 1000 Bitcoins for 38 million dollars and gave them to Grascale. In return, they bought 1.063.000-odd GBTC shares and sold those shares cheaply in the market, but that money bought 1000 BITCON from the market.
Not enough to pay his debts! The amount of investors in Grayscale is so huge that the only way for these guys to make a loss was for the BITCOIN PRICE to DOWN. Because when they sell GBTC shares cheaply, they will have little money, so they can buy 1000 Bitcoins with that money.
the price should have dropped… IT DROPPED! So is there any temporal proof of this! There is room. Look what I brought you! The amount of Bitcoin that Grayscale stocks UNLOCK day by day… This is a big investor issue that ends at the end of July…
Let’s take a closer look: For example, GBTC shares of investors who gave 16,000 Bitcoins to Grayscale (6 months ago) on July 13 will be unlocked. It will enter the market. These guys will want to sell these shares at a NEGATIVE premium and get cheap Bitcoin in return.
36) If Bitcoin isn’t cheap, they’re going to charge WILDLY. That’s it (most of them huge investors) it is inevitable for investors to open Shorts through the Futures market. So why aren’t there many stocks after August? Because when the premium between GBTC and NAV is Negative, these guys no longer have the desire to borrow Bitcoin and give it to Grayscale. That’s why I think that the suppression of Bitcoin will continue until at least the end of mid-July so that these big investors do not lose.
By the way, we don’t know the names of those big investors, but I guess one of their moves. He’s very famous in the Twitter community but not liked by other whales. Of course, there are many other BASIC factors on Bitcoin price, but I wanted to explain this factor to you, I hope you like the information.
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