The Market Impact of the Whale Grayscale Transformation ETF

As a significant institutional investor representative in the encryption world, Grayscale has long provided compliant cryptocurrency investment channels for investors through trust funds. However, since January 11, when Grayscale's GBTC trust successfully transformed into a spot Bitcoin ETF, the situation has changed significantly.

As of now, GBTC has cumulatively flowed out $3.45 billion, becoming the only Bitcoin ETF product in a net outflow state. This means that Grayscale's GBTC has become the main factor for the overall capital outflow of Bitcoin ETFs recently, constituting the largest selling pressure in the short term.

Grayscale has been a prominent institutional investor in the encryption field since 2019. As a subsidiary of the digital currency group DCG, Grayscale has been providing compliant investment channels for investors through trust funds before the listing of the spot Bitcoin ETF, with over 90% of its funds coming from institutional investors and retirement funds.

On January 11th this year, when GBTC transitioned to an ETF, the management scale of Grayscale's GBTC reached 25 billion USD, making it the largest encryption custody institution at that time. Grayscale also manages several mainstream asset trust funds, including ETH, BCH, and LTC, with a relatively conservative investment style.

These trust funds are essentially "one-way investment tools," allowing only capital inflow and no outflow in the short term. Investors choose to deposit BTC, ETH, etc., for arbitrage purposes, which not only leads to the continuous growth of Grayscale-related trust sizes but also positively impacts the spot market by absorbing supply to alleviate selling pressure.

Although Grayscale's GBTC is now seen as one of the factors triggering the bear market, it was regarded as a major driving force during the bull market in 2020. In the context of Bitcoin ETFs being delayed in approval, Grayscale has become almost the only compliant entry channel, facilitating qualified investors and institutions to enter the encryption market.

In fact, as early as June 2023, after the news of the spot Bitcoin ETF from BlackRock emerged, the negative premium of GBTC began to gradually narrow. According to data from July 1, 2023, the negative premiums of trust products such as GBTC and ETHE were almost at historical lows, with the negative premium of GBTC reaching 30% and ETHE also hitting 30%.

In the past six months of ETF expectation speculation, the negative premium of GBTC has continuously narrowed, rising from 30% to nearly 0, and most funds that have positioned themselves early for buying are now at a profit-taking exit point.

From the perspective of negative premium, this has caused significant losses to private investors who once participated in GBTC and ETHE trusts in the primary market, as these trust products cannot directly redeem their underlying assets. When these investors sell their shares in the secondary market after the unlocking period, they can only suffer losses based on the negative premium at that time.

It is precisely for this reason that Grayscale has been actively promoting the transformation of trust products like GBTC and ETHE into ETFs, to open up funding and exchange channels, eliminate negative premiums, and protect the interests of investors.

However, after GBTC successfully transitioned to a spot ETF on January 11, it began to create sustained selling pressure on BTC. As of recently, GBTC saw a daily outflow of over 640 million dollars again, setting a record for the largest single-day outflow to date, with a total outflow of 3.45 billion dollars since the transition to ETF. In contrast, the other 10 ETFs are all in a net inflow status.

It is worth noting that as of January 23, the total trading volume of the first 7 trading days of all spot Bitcoin ETFs was approximately $19 billion, with GBTC accounting for over half of that. This indicates that the incremental capital brought by the ETF is, overall, still hedging against the selling pressure caused by the continuous outflow of funds from GBTC.

One of the reasons for the outflow of funds and selling pressure on GBTC is its high management fee. The 1.5% management fee of GBTC is much higher than the fee levels of other ETF products, which range from 0.2% to 0.9%.

In a sense, this will be a public game: GBTC currently holds over 500,000 BTC (approximately $20 billion), and the institutions and funds waiting to enter the market will inevitably look for the right opportunity to gradually encroach upon this share. This means that in the near future, the selling pressure from GBTC may continue to suppress the willingness of funds to actively flow in.

Looking back, those "bull market drivers" that were seen in 2020 as attracting incremental off-exchange funds have not only lost their effectiveness in the current environment but have even become potential risk factors that could trigger turmoil in the industry.

In the fast-paced development of the industry, abandoning the over-reliance on large institutional layouts and rationally viewing the role of institutional investors may be one of the most valuable experiences we can gain in this special cycle.