Beginning of the End for BTC?

Or end of the beginning?

For investors who believed that BTC prices could only travel in one direction, welcome to your initiation.

Having failed to sustain a rally over US$60,000 and on the prospect of Americans having to pay more tax on any capital gains made from holding BTC or its ilk, BTC has now stumbled into the weekend on thin volumes, an exceedingly dangerous place to be.

So challenged was BTC, that holders of Grayscale BTC Trust, which allows investors to enjoy the full flavor of BTC without the fat, are now seeing their holdings trade at substantial discounts.

Unlike buying BTC outright, investing in Grayscale’s product involves the purchase of shares which typically entail lock-ups and restrictions on how those shares are disposed.

And while Grayscale BTC Trust (GBTC) was in hot demand when prices were frothy, shares in the trust are now trading at a record discount to the value of the BTC that it should be tracking.

The US$35 billion GBTC shed a record fifth of its value last Friday as BTC tumbled below US$50,000, an important level of support.

BTC’s fall has helped widen the disconnect between GBTC’s share price and the underlying value of its BTC holdings to roughly negative 19%, according to data from Bloomberg.

Investors are in part being squeezed because of the structure of Grayscale BTC Trust, which from the get-go didn’t offer very favorable terms.

Unlike other ETFs, Grayscale doesn’t allow redemptions and owners of shares in the trust must find buyers in the secondary market if they want to sell – just like the Hotel California, investors can check-in anytime they like, they just can’t ever leave.

Faced with increased competition from BTC ETFs in Canada, and ETF-like products in Europe, GBTC has progressively seen the premium for its shares whittled, but now American investors are almost in “dumping” mode on the prospect of higher capital gains taxes.

Because GBTC is so much more inefficient to gain BTC exposure than just buying a Canadian BTC ETF, or just buying BTC outright, the plunge in the GBTC premium has fed into a self-perpetuating downward spiral for BTC’s price, and investors may not yet have seen the worst for now.

Meanwhile, investors in GBTC are rushing for the exits.

And even though Grayscale has pledged to fold GBTC into an ETF, it may be little comfort to the many GBTC investors who bought shares in the trust at the very height of BTC mania.