What to make of the action at Grayscale’s Bitcoin Investment Trust (GBTC) and Ethereum Trust (ETH)?

Both are trading at deep discounts to the price of their underlying assets. There’s talk that they might be affected by the liquidity crisis afflicting crypto and that they might wind down soon.

Why Does GBTC Trade at a Discount?

Since their launch (GBTC in 2013 and ETH in 2019), both trusts have mirrored the unpredictable price trajectory of their underlying assets, sometimes literally and, at other times, figuratively.

As in the past, it is difficult to ascertain the reason for discounts in their trading price because they don’t trade like standard exchange traded funds i.e., the supply and redemption of their shares are not a response to market conditions.

One could point to bitcoin-related news developments as triggers for price movement. But the trusts seem to have a mind (and prices) of its own, trading at wild premiums and discounts in improbable circumstances.

For example, GBTC began trading at a discount to bitcoin’s price last January. That was when the cryptocurrency’s price began its journey towards two price records. But GBTC’s shares seemed impervious to those developments and have maintained their steady descent.

Or one could investigate the trusts’ trades to determine a reason for its divergence from bitcoin price. But the shares trade in OTC markets that are not transparent and require fewer disclosures as compared to the stock market.     

Investors in the trusts are also subject to lock-in period before they can release them into the market; so, it is difficult to know when a fresh supply will hit the market. Institutional ownership of the trusts’ shares has changed since last year but some names, like Ark Investment Management, have remained constant. Some names are also common to both trusts.

Grayscale And The Crypto Winter

The interesting thing is that GBTC was originally marketed as a method to own an expensive and rapidly appreciating asset, bitcoin, at a cheap price. Its shares could also be shorted as a hedge against bitcoin’s spot price volatility. But shorting GBTC is supposed to be difficult.

Therefore, the only useful function for GBTC is to help investors own bitcoin. It doesn’t seem to be doing a good job at it considering the increasing pile of scandals it is associated with currently.

One connects its trading activity to lending firm Genesis, a sister company under the Digital Currency Group (DCG) umbrella, that purportedly gave money to hedge funds to buy GBTC shares and close the discount.

Genesis was also an authorized participant – the firm responsible for creating new shares – of both trusts. It was replaced in GBTC by another entity in November, after it reported a hole in its balance sheet, but continues to function as the creator of ETH’s shares. The replacement in authorized participants is a cosmetic change since both firms are owned by the Digital Currency Group (DCG).  

There are other problematic stories as well. People are also questioning GBTC’s claims of having 633,000 bitcoin in its reserves. Then, there is the case of a hedge fund is planning to sue the trust for conflicts of interest and mismanagement of the fund’s holdings.

Will GBTC and ETH last through the crypto winter?

It is hard to say. The assets under management (AUM) at GBTC, as of this writing, is $10.6 billion, down from a peak of $20 billion last year.

But investors don’t have many choices to exit the trust; it has been compared to a “roach motel” earlier because of the difficulties in offloading its shares. Recent conversation has centered around winding down of GBTC. Even that, as it turns out, is a drawn out process.

My guess is that they will survive. In the meanwhile, management fees continue to print profits for Grayscale’s executives.   

Withdrawing Staked Ether

Not much has changed on Ethereum’s blockchain after it moved from the energy guzzling consensus Proof of Work (PoW) method to the green Proof of Stake (PoS) consensus system.

Its participation rate – a metric developed the Ethereum Foundation to measure engagement with the platform – remains the same. The block time, or the time needed to produce a block of transactions for approval, has shown marginal improvement.

The blockchain’s infamously expensive gas fees are lower, Tim Beiko, Ethereum Foundation Protocol Support Lead, told CoinDesk. That might be considered an improvement were it not for the fact that the decline in fees is a function of less usage of the network.

Withdrawing Staked Ether

But there is some good news for investors in the blockchain. Developers are targeting March 2023 to enable withdrawal of staked ether, Ethereum’s native token. For context, validators in PoS are required to stake or deposit ether to validate transactions occurring in its network.

Some validators have been staking their ether since Dec. 2020, when the Beacon chain – the current chain on which Ethereum runs – was launched. In the run up to the Merge, as the transition from PoW to PoS is called, the numbers and popularity of staked ether increased dramatically because of attractive promised yields of up to 5%.

That is more than the yield being offered currently on T-bills. But the market for ether is relatively thin and involves many more risks as compared to that for government securities. According to Dune Analytics, 15.5 million or 12.91% of ether’s total supply has been staked.   

A Flood of Ethers?

Unstaked ether is more ether in the market and creates more selling pressure. But it is unlikely that a flood of ethers will hit the market after the withdrawal facility is made available. The release of ethers into the market might be more gradual. Investors pushed up ether prices in anticipation of the Merge. [The actual event generated considerably less excitement]. Since then, except for a spike last month, the token’s prices have mostly traded sideways.

Analyst trendlines already indicate a “breakdown” in ether prices in the short term, meaning the token’s prices will go south. There are also many other catalysts bubbling away in the broader ecosystem. The unwinding in cryptocurrencies is not yet complete and its ecosystem is due another capitulation, according to analysts. If another breakdown or capitulation occurs, that will add more pressure to ether’s prices.