• Digital Currency Group has authorized a $250 million share purchase of Grayscale Bitcoin Trust
  • Buy comes as GBTC shares continue to trade at a significant discount to the NAV

Digital Currency Group’s decision to purchase $250 million in shares of the Grayscale Bitcoin Trust is a prudent move to shore up liquidity as redemptions get more challenging in an era of bitcoin ETFs, says a former Guggenheim fund manager.

“What the market is realizing is that closed end funds, and trusts like the Grayscale trust, trade at a natural discount to NAV,” Steven McClurg, Chief Investment Officer of Valkyrie Investments, and a former Guggenheim fund manager, told Blockworks. “This is due to the illiquidity and difficulty to perform daily redemptions. ETFs don’t have that problem, as they create and redeem daily, forcing trading closer to NAV.” 

Currently GBTC trades at a -3.2% discount. In early March the discount hit an all-time high of -11%. As Blockworks has previously reported, the success of Canada’s two bitcoin ETFs (accessible to some American investors) has absorbed much of the fund flow that would be once destined for Grayscale.

Blockworks reached out to Grayscale for insight but the company had no comment on the purchase. 

Reportedly the success of these ETFs had led Canadian ETF managers to book one of their best Februaries ever — despite a stagnant economy.

McClurg believes that Bitcoin ETFs will push all closed end funds and trusts that hold bitcoin to a constant state of discount.

“Sometimes buying funds in the open market at a large discount is a good investment strategy. Particularly for bond funds,” he said. 

Jim Lee, founder StratFI, a boutique investment advisory firm says that GBTC’s relatively high management fees push away prospective investors. Lee thinks this will change as competition in the space heats up. 

“If their fees don’t go down, the Grayscale Trusts may trade at a deeper discount,” he told Blockworks.

One insider with knowledge of the deal told Blockworks this was a play to stimulate demand for GBTC and eliminate the discount because of pressure from trust shareholders. 

As Blockworks’ Co-founder Michael Ippolito reported in one of his recent newsletters, one of the ways that high-interest savings accounts for digital assets, such as BlockFi and Celsius, are able to pay out significant interest rates is because of their use of arbitrage trading on the Grayscale premium (to be sure these firms operate sophisticated trading desks with a diverse portfolio). As recently as February, BlockFi held just over 5.6% of GBTC shares.

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    Sam Reynolds is a Taipei-based reporter, covering digital assets and regulation throughout Asia. Before joining Blockworks he was an editor at Forkast News and an analyst with IDC.