Is the Bitcoin Price Plunge Attributable to Grayscale GBTC Dumping?

Has the significant profit-selling of Grayscale’s GBTC become a normal choice as it almost completely erases the previous 50% discount?
(Previous summary:
SEC Commissioner Crenshaw, who voted against, reveals reasons for opposing Bitcoin spot ETF?
)
(Background information:
Vanguard, the index fund giant, refuses to sell cryptocurrency products, including Bitcoin futures ETF
)
Since the SEC approved the Bitcoin spot ETF this week, the price of Bitcoin has fluctuated. After the approval, it reached a peak of over $48,000, then fell all the way to a low of below $42,000 after a period of consolidation around $46,000, and is now stabilizing around $43,000, with a 7-day decline of 1.69%.
According to Yahoo Finance data, the trading volume of the Bitcoin spot ETF was $4.6 billion on the first day and reached a total trading volume of $3.1 billion on the second day, with a cumulative total of nearly $7.7 billion. Among the newly launched Bitcoin spot funds, BlackRock led with a trading volume of $564 million on Friday, while Fidelity had a trading volume of $431 million.
Both of these are overshadowed by the trading volume of Grayscale’s GBTC – the ETF had a trading volume of $2.29 billion on Thursday and $1.83 billion on Friday, accounting for more than half of the total trading volume.
According to BitMEX Research, on the second day of trading for the Bitcoin spot ETF, GBTC saw outflows of $484 million, with a total outflow of $579 million in the first two days.
What is the connection with Grayscale’s previous discount?
From the data, it can be seen that the previous discount has almost disappeared after the trust was converted into an ETF. In December 2022, the discount reached 50%, but it gradually decreased as the market recovered and expectations for the ETF grew. On Monday, the discount had narrowed to 5.6%.
Why is this? This requires an explanation of the differences in structure between trusts and ETFs.
Trusts, such as Grayscale’s GBTC, are closed-end, which means they issued a fixed number of shares at the IPO and these shares are traded on the secondary market. Once issued, the number of trust shares cannot increase or decrease based on market demand. Therefore, the market price of the trust is mainly determined by the supply and demand of buyers and sellers, which may result in a significant difference between the market price and the actual value of the underlying assets, known as the net asset value (NAV). If the market demand for the trust decreases, its market price may be lower than NAV, resulting in a discount.
ETFs are open-ended and allow authorized participants (APs) to create or redeem ETF shares when needed. These authorized participants can exchange cash or assets of corresponding value with the ETF manager based on market demand for ETF shares to create new ETF shares or redeem ETF shares for cash or assets. This flexible share creation and redemption mechanism ensures that the market price of the ETF is usually closely related to its NAV. For example, if the trading price of ETF shares on the market is lower than NAV, authorized participants can purchase these undervalued shares and redeem them for assets of corresponding value. This operation not only brings profit to authorized participants but also helps increase the market price of ETF shares, bringing them closer to their NAV.
Therefore, purely from a price perspective, it is a rational choice for investors seeking financial returns to sell when the discount disappears after buying at a low level. This will lead to Grayscale selling Bitcoin to redeem cash for those who sell GBTC shares.
Further reading:
Why did ETFs get approved while Bitcoin plummeted? Bloomberg analyst: Massive outflow of Grayscale’s GBTC funds and high management fees forced profit-taking
So did Grayscale really dump its holdings?
According to data from Arkham, there is no evidence of dumping behavior. Currently, based on the marked Grayscale addresses, Grayscale’s holdings are approximately 617,000 Bitcoins, worth about $26.6 billion, and the recent outflow of funds is about $1.67 billion. In other words, Grayscale did not have to sell a large portion of its Bitcoins due to continuous selling of GBTC shares by customers, and the amount sold still accounts for only a small portion.


Grayscale’s current holdings. Source: Arkham
However, market sentiment has not eased. One possible argument is that Arkham may not record all of Grayscale’s addresses accurately, and this statistics may have missed some Bitcoin sales and transactions, so the $1.67 billion in selling may not be accurate.
There is another more frightening argument that involves the issue of fees for all Bitcoin spot ETFs. Currently, according to Bloomberg analysts, Grayscale’s GBTC has the highest management fee among ETFs:


Current ETF management fee rates. Source: Bloomberg
As can be seen, the fees released by issuers such as Franklin and Bitwise are relatively low, while Grayscale’s fee is the highest at about 1.5%. If investors are unwilling to pay this 1.5% management fee, they can choose to sell GBTC shares and invest in other ETFs. As this ETF is entirely cash-redemption, when selling GBTC shares, Bitcoin cannot be chosen for sale and can only be sold for USD, which may lead to selling pressure and price reduction.
This leads to the argument held by many people on Twitter: not selling now does not mean there won’t be selling in the future. If more people in the future discard GBTC shares due to fee issues and switch to buying shares of other Bitcoin ETFs, and if the selling behavior leads to more people choosing to hold cash and wait due to the continuous decline in price, it is not ruled out that Bitcoin may continue to decline below $40,000.
Crypto KOL Neuner says Bitcoin “may face a period of selling pressure” because “$25 billion is a considerable amount, and even if only 20% is redeemed, it means there will be $5 billion in sales in the market.”


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