The skies around bitcoin-connected institutions and organizations are getting darker. Grayscale has been the central focus of major institutional affiliates with BTC over the past several months. The Bitcoin Trust Fund in particular has grown rapidly.
Before the February 21st crash, Bitcoin had posted a decline on February 19th. Now, after the latest drop, Grayscale’s premium has turned negative again in February after last week’s 1 drop.
How does a negative premium affect the market?
Understanding the concept of the grayscale premium is invaluable. The premium is the difference between the local asset price or NAV and the market price of the stock or holding. Investors who are able to buy at the strike price of the NAV while maintaining high levels of profitability will lock in the premium if they decide to sell after the initial 6-month lock-up period.
Tier 2 investors buy GBTC shares on the open market while enjoying high premiums. However, this only happens when there is higher demand for GBTC shares. One period when this situation occurred was in late 2020.
When Grayscale began accumulating bitcoin under his stewardship, the premium increased from 6.87% in mid-July to 25% in mid-December. Demand was high. Many thought that the savings frenzy indirectly fueled Bitcoin’s rally.
But the bonus began to expire in mid-January to February 2021.
The top chart shows that accumulation slowed after the grayscale premium began to decline in value. The largest accumulation in a year was on January 19, but there was a major correction on January 21.
A bullish rally pushed valuation above $50,000 by February, but Grayscale’s premium continued to decline, only alongside mid-tier buying.
Will a Discounted Bonus Hurt the Bitcoin Rally?
Probably.
Accredited investors would be reluctant to align their position with Grayscale if the premium remains at a discounted rate and Bitcoin truly sees the greatest movement when the premium is above 10%.
The recent premium decline may also limit Grayscale’s accumulation activity. This could cause Bitcoin’s future rally to become stagnant or stalled.