GBTC: Becoming Bullish On Grayscale Bitcoin Trust

bitcoin with circuit board, 3d render

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UST Collapse and its Effect on Bitcoin

There’s never a dull moment in the world of crypto with the past few months ’events underscoring just how volatile the industry is. Before outlining my bullish stance on the Grayscale Bitcoin Trust (OTC: GBTC), a quick overview of events is necessary.

The primary event that has caught many off-guard is the stunning collapse of the Terra blockchain stable coin project.

Terra is a trustless, programmable blockchain ecommerce platform that offers fiat-pegged stable coins to provide more stability when conducting cross-border payments. Terra relies on its utility and staking token, LUNA, as well as several other stable coins that are pegged to many of the world’s top fiat currencies – including TerraUSD (UST-USD). By using stablecoins, the Terra crypto ecosystem offers low fees, instant settlement, and frictionless cross-border exchange to power retail transactions

Source: Terra blockchain

The description sounds innovative, yet here is the reality of what Terra really is. TerraUSD (UST-USD) was an underfunded “stablecoin” that the creators thought could maintain a dollar-for-dollar peg by issuing / burning its Luna staking coin. The hard reality is the project failed miserably with LUNA (LUNC-USD) entering into an inflationary death-spiral wiping out $ 40 billion in investor capital.

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Terra blockchain (terrablockchain)

The shockwave of the collapse set off a chain reaction in the crypto-verse with no project spared from a massive wave of selling. In the case of Bitcoin (BTC-USD), the LUNA foundation liquidated its BTC hoard of 80k coins further catalyzing the massive sell-off. BTC approached the 25k level before setting a range in the 28-31k range.

I view the collapse of LUNA / UST, as a clearing event as the speculative excess in crypto has now been run out with many burned from the collapse. The hot money that flowed chasing the momentum trade is now vanquished leaving exactly what?

My view from the beginning of my crypto journey is just that — a journey with the vast majority of gain available in the outyears typically as the end of the decade. The current environment is akin to the period post a massive equity sell-off, flattish sideways action as the massive overhead in supply needs to be worked off.

Legislation Looming

A collapse of this magnitude especially in light of the nature of the project, a supposedly stable money market alternative with a generous yield likely ensnared many investors that typically would not venture into crypto. I have no doubt many wondered, where is the regulation? Congress will seize on this moment to pass additional legislation as evidenced by Senator Loomis upcoming crypto bill. The bill is many months in the offing, not a knee-jerk reaction to recent events which gives me confidence there is some real meat to it. Senator Gillibrand of New York is a co-author of the bill which adds a bi-partisan appeal to the bill. What I would like to see come forth is strict regulation of new projects. If the splitting of the regulatory apparatus between the CFTC and SEC comes into play, the wild west atmosphere / reputation of the industry can be reeled in. My opinion is if the SEC is given new regulatory powers many of the current projects around, especially those with founders issued pre-mined or coins at a fraction of a penny would be classified as securities. Notice there was no pre-mine of BTC thus it easily passes this test. Coupled with its decentralized nature, I am very confident BTC will remain a commodity.

The Case for GBTC

The looming legislation is a key clearing event for the industry as I view it, a key catalyst to pave the wave for a Bitcoin ETF. An ETF is the key vehicle to pave the way for widespread adoption of the asset class. Typically, in an election year, I would be skeptical that anything would be accomplished. In this case, due to the collapse of UST, the stage is set for the Loomis / Gillibrand bill to move in the Senate. That said, the upcoming ETF applications before the SEC will more than likely be shot down as the SEC waits for further regulatory powers.

Grayscale via its GBTC product holds over 630k coins or over 3 percent of total float. The product is battle-tested with excellent custody solutions and a long track record as a publicly-traded entity. The challenge with the product is its inability to trade at net asset value. The discount to net asset value on GBTC is now comfortably in the mid to high 20 percent range, a level that is interesting to new investors while a source of dismay to many longer-term holders.

My interest in the product now is a strategy change versus what I have employed over the past year. I have shifted from purchasing the coin outright and reinvesting the interest offered on it through various crypto exchanges to now viewing GBTC as a better alternative. A portion of the strategy shift evolves from the drop in interest available coupled with the steeper increase in the discount to NAV.

I am of the opinion that GBTC will convert to an ETF thus vaporizing the steep discount. I view the discount as a form of a “dividend” that will be taxed as a capital gain versus regular income. For my calculations, I am factoring in a four-year holding period to offer ample time for the regulatory framework to be in place for a Bitcoin ETF to come into existence. I realize many on this forum have complained about the management fee; the discount to NAV more than offsets the fee.

Secondly, there have been numerous incidents of tracking error in the fund that the ETF wrapper should address. At the current rate coupled with the recent blow-up in UST, an attractive set-up in my view has opened for a patient long-term investor.

Risks to Thesis

There are a few notable risks to the thesis that an investor needs to be aware of and comfortable with. The primary one revolves around the regulatory framework, never a sure thing. While I believe politicians are interested in the space even the best-intentioned bills have found a way to perish once it approaches committee. I do believe the UST blow-up should act as a catalyst but there is no guarantee this will come into fruition.

Furthermore, a delay or failure of the bill will naturally push back any sort of US Bitcoin ETF and with it the disappearance of the discount to NAV.

The asset class itself is typically more volatile than equities with the recent drop from BTC highs in November 2021 underscoring this reality. An investor will need to be not only comfortable with the risks but the volatility. When I started allocating directly to crypto in 2020, I took a ten-year view with projections out to 2030. My view has not changed now two years later with an eye on 2030 not later in 2022. Good luck to all, thanks for reading and commenting.

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