Insight
June 28, 2024
As the market continues to witness the success and popularity of spot bitcoin ETFs, and with spot ether ETFs soon to join the trading arena, we point out to investors that not all crypto funds have transitioned to ETFs. In particular, the Grayscale Digital Large Cap Fund (GDLC) and Bitwise 10 Crypto Index Fund (BITW) stand out as large multi-asset funds that are currently trading well below their net asset value (NAV), and even below the value of the BTC and ETH they hold. The Osprey Bitcoin Trust (OBTC) continues to trade at a discount to NAV even though the fund's sponsor has committed to explore strategic alternatives. These discrepancies may present unique opportunities for investors seeking undervalued assets in the crypto market.
Looking at the funds individually, GDLC, which holds 5 assets (70.1% BTC, 24.0% ETH, 3.8% SOL, 1.5% XRP, and 0.6% AVAX), is trading at 1.2% discount to just the bitcoin held in the fund. If we include ETH into the analysis, the discount jumps to 24.0%. This completely omits the value of the other 3 assets (small in total weight). BITW, which holds 10 assets, isn’t as severe as GDLC, as it trades to a premium to its bitcoin holdings. However, BITW is trading at a 21.6% discount to its combined BTC and ETH holdings.
OBTC is a bit of a different analysis in that it was one of the bitcoin funds that never converted into an ETF. On March 5th, the fund’s sponsor committed to evaluating strategic alternatives with a deadline of September 1st. While the discount to NAV narrowed substantially on the news, OBTC still trades at a 6.7% discount. If one were to assume that investors would receive funds equal to the fund’s NAV on September 1st, that would represent an annualized return of 47.8%, excluding management fees.
One major hurdle faced by these funds, contributing to their consistent trading at discounts, is the absence of a mechanism to bring the discounts closer to NAV. With redemptions closed and limited avenues for structural changes through corporate governance, the ability to close the NAV discount remains limited.
Furthermore, the issue of liquidity adds another layer of complexity. These funds trade OTC rather than on securities exchanges and have rather low trading liquidity. This lack of liquidity deters institutional and activist interest, potentially perpetuating the discounts.
The spot bitcoin ETFs have experienced tremendous success, attracting $14.4B in net inflows in less than 6 months since their launch. While these bitcoin ETFs have dominated conversation topics as of late, it seems that they may soon need to share the spotlight with ether ETFs, 8 of which were approved on May 23rd. With speculation about the timing of the start of trading and demand running high, recent updates from ETF sponsors seem to indicate that trading could begin shortly.
On Monday, Jan van Eck, the CEO of VanEck, shared a tweet featuring an image from what appears to be inside the SEC's offices. The next day, the company filed a Form 8-A, registering shares of its spot ether ETF, leading many to believe that trading would begin 7 days later given that was the difference in timing between when the 8-A was filed for its bitcoin ETF and when trading began. And while that might be true for this specific filing (21Shares filed its 8-A on Thursday too), that analysis omits the variability in the timing between 8-A filings by other bitcoin ETF sponsors and the beginning of trading as the filing table shows. While the data suggests trading might not begin in precisely 7 days, it should be coming in relatively short order.
As a reminder, the upper end of our estimate of fund flows 5-months post ETF launch (a similar time at which we conducted the analysis) was $4.5B. There are a lot of reasons to think that the number might be south of that (lack of staking, no identifiable catalyst, ETH’s utility use case vs BTC’s investment/store of value, lack of demand for ETH futures ETFs, and unattractive futures basis dynamics). The market seems less excited about the prospect as well. The July ETH CME futures contract is presently trading at a 5.9% annualized premium, while the July BTC CME contract is trading at 9.3%.
In a separate ETF event, VanEck and 21Shares both filed registration statements for ETFs based on the Solana token (SOL). While SOL experienced a price surge in response to this news, our analysis suggests that the market's optimism about a potential listing may be premature. This is because SOL, the underlying asset, lacks the same level of integration into regulated markets as ETH or BTC. There are no futures trading on a federally related exchange, such as the CME, as was the case with BTC and ETH. In the case of the spot BTC and ETH ETFs, regulated futures trading was a necessary precursor because their tight correlations with spot prices required (under court order) the SEC to treat both assets similarly (spot and futures). That structure presently does not exist for SOL.
Moreover, the SEC has already asserted its jurisdiction in the cases against Coinbase and Binance in part by citing the SOL token as a security. While the outcomes of these cases are pending, it is improbable that the SEC would greenlight a financial product linked to an asset that it doesn't see as complying with securities laws. Although there may be potential for change in the future, with the introduction of new laws and evolving regulatory perspectives, given the current landscape, the chances of a SOL-based ETF gaining approval are slim.
Significant bitcoin holders emerged this week to sell, exerting downward pressure on the bitcoin price. Bitcoins seized by the US and German governments in criminal cases made their way to exchanges, while the bankruptcy trustee in the Mt Gox case informed creditors of upcoming fund disbursements starting in July. This development led to a drop in bitcoin's price, sliding through the $60K level to $58.4K before making a recovery later in the week.
Last week, analytics company Arkham Intelligence raised the alarm as bitcoins seized by the German Federal Criminal Police Office (BKA) made their way to major exchanges like Bitstamp, Coinbase, and Kraken. This movement follows the confiscation of approximately 50K bitcoins from the illicit streaming platform Movie2K in January. As of today, the BKA's bitcoin holdings are down to 46K, valued at around $2.8B. The BKA remains active, with coins now being transferred to an additional partner, Flow Traders. The transfer to exchanges has been somewhat erratic, with transactions totaling $98M on 6/19, $13M on 6/20, $24M on 6/25, and $37M on 6/26. While the exact plans of the German authorities regarding the sale remain unclear, it is unlikely that the BKA intends to retain long-term ownership of these bitcoins.
On Wednesday, the US government moved $240M worth of bitcoins to Coinbase presumably to sell. These bitcoins are from forfeiture of coins in connection with the arrest of Banmeet Singh, who was arrested in January for operating a darknet drug delivery service. The US government controls $13.6B worth of bitcoins (217K BTC), confiscated as parts of various civil forfeitures like Silk Road and the hack of Bitfinex.
Considering the substantial holdings of bitcoins by the US government (recently surpassed by MSTR), the curiosity surrounding their market-selling activities is understandable. However, predicting these actions has proven challenging due to the government's changing selling methods over the years - from auctions via the US Marshals to sales directly on exchanges. Adding to the unpredictability, the government itself hasn’t stuck to its own plans. The court filing in the James Zhong case read, “Of the Bitcoin forfeited in the Ulbricht case, there remains approximately 41,490.72 BTC, which the Government understands is expected to be liquidated in four more batches over the course of this calendar year.” It did not adhere to that plan, executing only two sales.
Finally, on Monday the rehabilitation trustee in the Mt Gox bankruptcy case announced that it would begin repayments of bitcoins and bitcoin cash to creditors in the beginning of July. While we have known all along that creditors would be paid back, promised by October 31st this year, the news continually spooks investors. The long-held coins, totaling 142K coins worth $8.6B at current prices, seem to get into creditors hands sooner rather than later. But as we outlined previously, the selling from retail holders might be less than feared, about $1.4B at current prices. Furthermore, we’ll point out that Gemini Earn users received $2.2B in crypto on May 29th after being locked up for over 18 months, and the market didn’t seem to bat an eyelash. This is just another point that the news might be worse than the event itself.
Bitcoin fell again this week on the aforementioned emergence of selling (and prospect of selling) by major bitcoin holders. Liquidation of long futures positions hit $157M across offshore exchanges, likely exacerbating the move as bitcoin fell through $60K. Funding rates for perpetual swaps briefly turned negative during this period but have since reverted to a positive trend. While funding rates exhibit a positive bias, they remain significantly lower compared to the highs seen in March. Other signs of investor positioning are subdued. Implied volatility from listed options continues to decline and the basis on CME futures is well off the March highs.
Outflows from ETFs moderated over the past week and flipped to inflows on Wednesday and Thursday. While we think much of the outflows experienced over the past 2 weeks had to do with covering the basis trade, we will have to look at positioning changes in the Commitment of Traders (COT) report when it is released later today.
Investing:
Bernstein Says Crypto Would Be Primary 'Trump Trade' If Election Sentiment Shifts More Republican - The Block
Nomura Survey Finds Over Half of Japan’s Investment Managers Plan to Invest In Crypto - The Block
Germany Begins Selling Its Bitcoin Billions, Triggering Volatility Fears - Decrypt
Bitcoin Price Falls After U.S. Sends $240M Worth Seized BTC to Coinbase Prime - CoinDesk
Mt Gox to Return Coins to Creditors in Early July - Mt Gox
Regulation and Taxation:
The CFTC is Probing Jump Crypto - Fortune
Abra Settles With 25 States for Operating Without Licenses, Will Return Up to $82M to U.S. Customers - CoinDesk
Coinbase Sues SEC, FDIC Over FOIA Requests - X
Crypto Unmentioned at First 2024 U.S. Presidential Debate - CoinDesk
Supreme Court Overturns "Chevron Deference" - US Supreme Court
US Regulators Could Approve Spot Ether ETFs for Launch by July 4, Sources Say - Reuters
Companies & Industry:
Jump Crypto Head Steps Down - X
July 11 - June CPI release
July 25 - Bitcoin 2024 Conference
July 26 - CME expiry
July 31 - FOMC interest rate decision
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