BlackRock's "Jianhu" grayscale GBTC ETF application has a geometric impact on the latter?

Author: Climber, Golden Finance

A few days ago, BlackRock, the world's largest asset management company, became another business giant to apply for a spot bitcoin ETF after institutions such as WisdomTree, ARK and 21Shares. What is different from the past is that BlackRock, which has a strong corporate strength and an ETF pass ratio of 575:1, has given the encryption market the hope of the birth of the first spot Bitcoin ETF, and also brought grayscale (Greyscale), which has been rejected repeatedly before. Here comes a new possibility of approval.

After BlackRock officially submitted the spot bitcoin ETF application to the SEC, the driving effect was obvious. Asset management companies WisdomTree and Invesco (Invesco) respectively submitted such applications again; the market has multiple positives, bitcoin rose to $29,000, Fidelity and Charles Schwab The supported encryption platform EDX Markets is officially launched.

The most significant impact is the digital asset management company Grayscale, which can be said to have seen a rise in volume and price in terms of data. In just a few days, the daily trading volume of Grayscale GBTC increased from US$16.1 million to nearly US$80 million, an increase of about 400%; the stock price peaked at US$17.67, an increase of 27.65% in the past five days.

Grayscale seems to have finally started to move in a good direction after February 24, 2021, but is this really the case? As the largest "cash cow" of the parent company DCG, after a long period of fighting against the crypto bear market, can it really be enough to return to the top with the approval of the spot Bitcoin ETF? This article will try to do some cold thinking under the current hot trend of the encryption market.

Entrance midway, detour to cut Hu

I have to say that judging from the timing and disclosure details of BlackRock's application for Bitcoin ETF, it is really confusing and puzzling.

First of all, in terms of the mainstream trend of the encryption market, the SEC has stepped up its crackdown on major exchanges this year. In June, the SEC successively sued Binance and Coinbase, and the fire of supervision became more intense, and even the assets of Binance.US may be frozen. However, on June 14, the SEC first stated that it would take 120 days to respond to Coinbase’s previous rule-making request, forming a mediation buffer period; on the same day, Binance.US submitted a preliminary compromise plan in a Washington court hearing, and the two parties will negotiate to reach a settlement.

And on the second day of these two regulatory incidents, on June 15, CoinDesk quoted people familiar with the matter and broke out that the asset management giant BlackRock will submit a Bitcoin ETF application, and will use Coinbase (COIN) Custody as the ETF and Bitcoin ETF application. Spot market data from cryptocurrency exchanges for pricing. In the following days, more details about BlackRock's application for Bitcoin ETF were reported. Bloomberg's senior ETF analyst believes that this application is different from the past and will be approved by the SEC by the end of this year.

Judging from the market news a few days after BlackRock filed the application, Binance and the SEC formally reached a settlement, the U.S. Third Circuit Court retained jurisdiction over Coinbase’s challenge to the U.S. Securities and Exchange Commission (SEC)’s inaction, and the SEC did not file a complaint with the Cryptocurrency Exchange. The market is too aggressive. All in all, the encryption market has formed a temporary period of peace.

Secondly, before BlackRock officially applied for the spot Bitcoin ETF, a group of companies and institutions led by Grayscale were rejected without exception. Especially for Grayscale, the SEC not only severely rejected the approval request again and again, but also recently rejected the Grayscale Filecoin trust product application request. In this regard, the SEC explained to the outside world that the bitcoin ETF will only be approved when the bitcoin market is mature enough to prevent fraud and manipulation.

Although Grayscale has filed legal proceedings against the SEC for this matter, the result will not be ruled until the third quarter of this year. The outside world commented that even if the SEC loses the case in court, they will still have other reasons to return Grayscale’s spot bitcoin ETF application.

This undoubtedly means that the SEC has no intention of approving Grayscale's spot Bitcoin ETF at all.

Judging from the details gradually disclosed by the media, the partner of BlackRock’s application this time is Coinbase. One is the world's largest asset management company in the traditional financial field, and the other is a Top3 exchange in the encryption market. The combination of the two parties, the success rate of application approval is self-evident.

Of course, the two have been working together since the middle of last year, but this time BlackRock will not only use Coinbase (COIN) Custody to price ETF and cryptocurrency exchange spot market data, but also use Coinbase Custody as an asset custodian. That is to say, client funds are operated separately, and the custodian and custodian belong to different institutions, which can curb the misappropriation of client funds to a certain extent.

In addition, BlackRock made two changes to ensure the pass rate. First, the spot bitcoin ETF submitted for formation is actually an iShares bitcoin trust, which differs from Grayscale in that it introduces a redemption mechanism. Second, the proposal lists a regulatory sharing agreement that allows sharing information with the SEC about market trading activities, clearing activities, and customer identities.

In contrast, Grayscale has not yet found an exact path for the passage of spot bitcoin ETF rules.

In view of this, Will Clemente, co-founder of Reflexivity Research, posted on social media that if BlackRock's spot ETF application is approved, it is undeniable that Operation Chokepoint 2.0 (chokepoint operation) was carefully planned to drive out encryption. industry companies and bring in large traditional companies with close ties to the US government in an attempt to gain control over Bitcoin/cryptocurrencies.

** Dilemma **

BlackRock submitted a spot bitcoin ETF application, and Grayscale passively benefited. In addition to the rise in volume and price of GBTC mentioned above, the negative premium rate of GBTC has also narrowed to 36.60%, which has recovered about 25.13% from the highest point (48.89%) observed in December 2022. The trust premium rates of other mainstream currencies have also recovered.

At first glance, Grayscale seems to be stepping up the ladder, and the previous operating embarrassment will no longer exist, and the approval of the spot Bitcoin ETF following BlackRock's footsteps is just around the corner. But as long as a little analysis, it can be seen that the next life of Grayscale will not be easy.

The most intuitive point is that since BlackRock announced its application for a spot Bitcoin ETF, Grayscale has been extremely quiet. Not only the official website of its social platform did not comment on this, but also no media broke out other grayscale remarks.

The impact of BlackRock’s submission of a spot bitcoin ETF application on Grayscale can be said to be more harmful than beneficial. Specifically, there are the following points:

1. Reduced management costs and reduced profit margins

Grayscale's GBTC has a Bitcoin management fee of up to 2%, which has been criticized by the industry, but it is precisely because of this that Grayscale's parent company DCG can obtain a stable income of about 230 million US dollars per year.

According to the documents submitted by DCG to the SEC in the third quarter of 2022, the company can obtain approximately US$230 million in revenue and US$68 million in profit from this fee each year, and this income accounts for approximately 8% of DCG's annual revenue. a substantial portion of the total revenue of $100 million.

With the approval of spot bitcoin ETFs in countries such as Canada, Grayscale GBTC's "dominant" advantage is beginning to be disintegrated a little bit. However, Grayscale's fund management fees can still be fine-tuned to maintain its attractiveness to investors.

But once BlackRock launches a spot bitcoin ETF, it is likely that Grayscale will have to significantly reduce GBTC management fees. As we all know, the rate of ETF products launched by BlackRock has always been low, and the rate of the recently launched BlackRock Metaverse ETF is only 0.47%.

The indirect result of this is that the revenue collected by its parent company has been greatly reduced, and it is even more unable to repay the $1.65 billion debt previously promised to Genesis. By then, the rumors of DCG's bankruptcy and liquidation may also become a reality.

2. Outflow of funds

Previously, Grayscale GBTC attracted a large number of institutional and qualified investors to deposit Bitcoin with its premium arbitrage strategy. With the momentum of the encryption market continuing to rise in early 2021, Grayscale has accumulated about 630,000 bitcoins, becoming the largest bitcoin holder in the market, and its lock-up volume has also shown explosive growth.

With the advent of the bear market in the encryption market, the premium has turned into a discount, and institutions have sold their shares after the lock-up expires. Nevertheless, as long as Grayscale still holds a large number of bitcoins, it can make huge profits by waiting for the currency price to rise again.

The conversion of Grayscale GBTC to ETF means that the previous semi-closed trust has been transformed into an open-end fund, and customers can perform redemption operations. If there are still only spot bitcoin ETFs headed by Grayscale on the market, institutions and investors will still use it as their first choice.

However, after BlackRock launched similar competing products, it was significantly better than Grayscale in terms of professionalism, safety, and usage costs. At this time, Grayscale’s original customer base will inevitably choose to transfer their property to the new platform to earn higher profits. income.

3. Falling valuations

Trust products such as BTC, ETH, and FIL launched by Grayscale, such as GBTC, have essentially evolved into paper securities of physical bitcoins, so these GBTC shares are cut out Grayscale stocks. All stock market capitalizations add up to make up Grayscale's valuation.

Moreover, once Grayscale's GBTC is successfully converted to ETH and the repurchase mechanism is introduced, Bitcoin, Grayscale's largest corporate asset, will shrink with changes in the encryption market, resulting in a decline in the company's valuation.

The most serious situation at present is that GBTC is in a serious long-term negative premium rate stage, which means that the company's GBTC share has been sold at a discount. The goal of converting to an ETF is to return the net value of GBTC to the same position as the actual Bitcoin price, thereby eliminating premium fluctuations.

However, as the negative premium rate narrows, the accumulated share of purchased customers during this period will also form a huge selling pressure, diluting the value of Grayscale GBTC's total share capital.

Therefore, no matter from which aspect, the valuation of Grayscale GBTC is under tremendous pressure.

Conclusion

The value of Bitcoin is increasingly recognized by people. With Europe and Africa and other spot Bitcoin ETFs that allow global investment, there is a high probability that capital will flow out of the United States and flow into other jurisdictions driven by interests. Although Grayscale GBTC is a company focused on the encryption industry, it also regularly discloses company information to the SEC. However, since there are still fraudulent behaviors in the encryption market, it is difficult to strictly control the risk control.

Under the balance of many parties, BlackRock entered the market. It’s just that traditional centralized financial institutions join in, and the Bitcoin held by users is handed over to a third-party organization for safekeeping. What is the significance of the birth of the blockchain?