Bitcoin’s worst selloff since December 2020 is dealing a certain hard blow to the largest fund tracking the crypto.
The $29.4 billion Grayscale Bitcoin Trust (ticker GBTC) has declined around 20% thus far this week, almost double the drop in the world’s biggest crypto.
Consequently, GBTC closed more than 14% below the value of its underlying holdings on Wednesday, a record discount, as per data compiled by Bloomberg.
The dislocation has increased in spite of Grayscale Investment LLC parent Digital Currency Group Inc.’s plans to buy up to $250 million worth of GBTC shares.
The GBTC free-fall pinpoints the magnitude to which the most recent leg of the retail-driven cryptocurrency craze is cooling. The trust has consistently traded at a premium to its net asset value since launching, with shareholders willing to pay up to 1 BTC as it rockets higher.
But given that GBTC does not allow redemptions, implying that trust shares can only be created, not destroyed like in traditional funds, the number of shares outstanding has spiked to a record 692 million.
Given that Bitcoin’s price is now stalling, that has created a supply and demand imbalance as authorized investors in the trust look to offload their shares in the secondary market.
“GBTC has a fixed supply and acts like a leveraged play on Bitcoin,” Bloomberg Intelligence analyst James Seyffart said.
“As price goes down, sentiment goes down, GBTC is going to fall further than Bitcoin. The same thing happens on the way up.”
The biggest crypto dropped for a fifth day on Thursday to a two-week low, its longest decline period since December. Demand for cryptocurrency has dropped amid rising signs that retail traders are retreating from markets, with everything from call options volume to GameStop Inc. shares to the mega-popular Ark Innovation exchange-traded (ticker ARKK) fund faltering.
On top of individual investors retreating, demand from firms may be slowing with the launch of multiple Bitcoin ETFs in Canada. Whereas U.S regulators have yet to authorize the framework, established issuers like Fidelity Investments have drawn plans.
“The addition of ETFs in Canada likely pulled away some capital from GBTC,” Seyffart said. “Mainly institutional money, because most retail can’t easily buy a Canadian ETF.”