The GBTC story – How Grayscale determines Bitcoin’s price, future
Grayscale’s dropping BTC premium is sounding alarm bells for investors and traders alike. Alarm bells isn’t an understatement, especially since the premium plummeted to 2% from about 30% back in December 2020. What does this mean? Well, the premium may have been the only motivation for institutions to invest in GBTC, and not Bitcoin.
This irrational motivation and market were explored by Peter Schiff during a recent talk. Drawing a parallel between Bitcoin and Gamestop, Schiff highlighted the red flags in Michael Saylor’s argument for buying Bitcoin using cash from the balance sheet of institutions. Saylor had underlined this move as a hedge against inflation. According to Schiff, however, if you buy Bitcoin under the flawed line of reasoning that its price will go up in the future, relying on future buyers to generate demand and buying is just as good as buying Gamestop.
This fuels the question – What makes Bitcoin different this time around, and why buy now and not before?
The argument is that Bitcoin’s price rally is centered on institutional buying and the digital gold narrative. The key here is that institutional buying is an investment in GBTC, and institutions are buying GBTC for a premium. Once the premium drops, the demand is expected to drop, and the same is what has happened.
What does this entail? Well, the drop in demand suggests that there may be a pause, or worse, a stop in institutional buying of GBTC, and this also highlights the possibility of the siphoning off of Bitcoin demand. As expected, this may lead to a drop in price. The price drop will be followed by a further drop in demand, and the direction of investment flows would change to accommodate the next best opportunity – If not a premium, then a discount.
Just as institutions lined up for Grayscale’s premium (That was the equivalent of free money to most as the profits from the appreciation in Bitcoin’s price were passed on to them), they may line up for discounts. Seeing that Grayscale has been the largest buyer, pooling institutional investor resources in GBTC, a drop in demand from Grayscale may be the final nail in the coffin for Bitcoin’s demand.
The price hasn’t experienced a free fall as of now, but it wouldn’t be wrong to say that there is a probability that there may be one in the future. A drop in premium may lead to a point where GBTC is discounted, and this could be the turning point for Bitcoin. The leftover demand may move towards GBTC, siphoning off further demand and the price of Bitcoin.
Simply put, GBTC that fed Bitcoin with demand and a price rally for all of retail and institutions, may turn against it, and with the changing tide, it might take demand and investment flows away from Bitcoin. Does this mean that GBTC will replace BTC altogether? That’s a tricky question to answer, but for institutions, Bitcoin may become synonymous with GBTC, instead of the other way round.
Such a hypothesis posits an uncertain future for Bitcoin’s price and for institutions and retail traders buying Bitcoin at the press time price level. However, this may only be the beginning. If GBTC premiums drop further, a different story may unravel.