Why the massive discounts? An “arbitrage” becoming painfully wrongUp until early 2021, Grayscale’s BTC trust continuously traded at a premium. Three Arrows Capital and other funds exploited this “arbitrage” by buying BTC, allocating to GBTC in-kind, and selling shares once delivered 6 months later, as we explained in 2020.
This trade got highly crowded during the 2020 bull run, and 3AC, among others, lent BTC from Genesis, invested in-kind in GBTC, aiming to sell GBTC at a premium after the 6-month lock-up. From January 2020 until March 2021, Grayscale’s trust grew from 260,000 BTC to 655,000 BTC, spiking massively in late 2020. The scope of this “arb” was unsustainably high, leading shares to flood the market far beyond the organic demand to buy GBTC and discounts to widen. The growth was also credit-fueled, leading Genesis, among others, to be caught offside, being the counterparty of loans based on collateral trading further and further away from its underlying asset.
Source: Skew, Grayscale