Divergence Inbetween Bitcoin And GBTC: An Arbitrage Chance
Rises in Bitcoin price have been large, but far less than rises in Bitcoin Investment Trust shares.
The divergence will not proceed forever, and has widened and closed several times in the past.
Investors may be able to exploit these conditions.
It is no secret that Bitcoin prices have been rising aggressively. Trading in Bitcoin primarily occurs via unregulated “exchange” websites. Security issues, corruption, or simply poor operating practices have caused numerous exchanges to fold in latest years. In many cases, the results have been that their users fully lose any of their (virtual) assets entrusted to the exchange. Alternatively, investors who want to go “long” in Bitcoin can hold it in wallets on their own private computers, or with other 3rd parties, but this just shifts security responsibilities away from the exchanges, but does not eliminate them.
The Grayscale Bitcoin Investment Trust (OTCQX:GBTC) exclusively holds Bitcoin. GBTC shares represent bit less than 1/Ten of a Bitcoin (0.09320637 BTC / share according to the last quarterly report). A annual 2% fee is paid to the sponsor of the trust, which erodes share value. The GBTC Bitcoins are held by a custodian (Xapo), so GBTC shares. The value of GBTC collective implicitly depends on the security of Xapo’s IT systems and treating of the trust’s Bitcoins.
The latest quarterly report discusses a risk that Xapo has not been able to insure its Bitcoin holdings. Since the monetary value of holdings is substantial, and Xapo serves other customers in addition to the trust, Xapo may targeted by sophisticated cybercriminals, insiders, or other threats. Without insurance, this could wipe out the value of GBTC shares.
While the 2% fee and custodian risk should logically lead GBTC shares to be less desirable than buying actual Bitcoins, this does not seem to be the case (yet), with GBTC substantially outperforming underlying Bitcoin prices recently.
As I write this today, the price of Bitcoin is up around 7% while shares of GBTC are up 38%. The seeming absurdity of this has been mentioned in other Seeking Alpha posts, including:
Why could this be happening?
Very first, there is a lack of effortless availability to trade in Bitcoins for many players who do not want to setup accounts with unknown exchanges on the Internet, but do have accounts that permit access to trade in GBTC via OTCQX. In a strange way, GBTC can be viewed as more liquid than the underlying Bitcoin.
2nd, it seems very likely that many people are simply not aware or don’t care about the difference inbetween Bitcoin and GBTC shares. If using purely technical signals, for example, GBTC may show up attractive.
Whatever the reasons, the fact is that the GBTC price has become very earnestly decoupled from its assets, and this could either be corrected or proceed. This decoupling is no secret and several lumps of advice can be found urging people to stay out of GBTC and buy Bitcoins instead. Anyone following that advice recently would have sacrificed large comes back, as the divergence has grown much worse. But timing is everything; it may only be a matter of time before this collapses, and given the volatility of Bitcoin, it would be a challenge to reasonably estimate when or how big an event is possible.
Presently, the Grayscale website shows a market price per share of GBTC at $294, and Bitcoin holdings per share of $200.60. It is hard to justify this
46% premium as being solely due to the difference in availability GBTC shares through traditional trading channels compared to cryptocurrency exchanges.
So, what is the chance for traders and investors?
A spread like this might naturally seem to suggest an arbitrage strategy, such as shorting GBTC while going long in Bitcoin itself. This strategy could even consistent with a bullish overall view on Bitcoin. If the Bitcoin price proceeds to expand rapidly, and eventually GBTC stalls or corrects, this would prove profitable, and reduce the risks of either aspect of the strategy alone. This would be a bet that the gap will eventually close rather than widen.
Historically, there have been gaps in these two prices that closed significantly, as can be seen in charts available on Grayscale’s website.
Alternatively, rather than arbitrage, a simpler strategy that only involves long GBTC positions (lightly traded in retirement accounts, for example), is to use the spread inbetween GBTC price and Bitcoin value to build technical signals for buying and selling of GBTC, as the spread expands and contracts. Slowing or ceasing to expand may be read as a sell signal, with slowing or ceasing spasm as a buy signal.
As other ETFs with Bitcoin are being proposed, it seems very likely that the gap may close. As long as GBTC remains the only vehicle available however, I will not be astonished if the gap proceeds to “accordion” in the meantime and even widen in its extremes. I have been long GBTC and am watching the spread widen and contract as buying and selling signals.
With such large price movements, there are many types of opportunities for traders, and this could be a very attractive situation. The limited volume in GBTC trading leaves these opportunities almost special for smaller traders to take advantage of.
Disclosure: I am/we are long GBTC.
I wrote this article myself, and it voices my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.