It is becoming increasingly clear how much leverage and risk was taken in the GBTC arb trade by 3AC and Genesis.
3AC pledges USD to borrow BTC from Genesis
3AC takes borrowed BTC and creates GBTC with Grayscale
3AC pledges GBTC to borrow USD from Genesis
An infinite loop of capital and leverage. Honestly, disgusting.
At the same time, BlockFi was arbing GBTC with client BTC (legally...BlockFi interest rate product).
The trade got crowded, and the GBTC premium to NAV flipped to a discount in Q1 2021.
The market sniffed out the excess, and rightly punished it.
The leverage is being wrung out of the system.
Life finds a way.
And we are still experiencing the fallout now, 18 months later, as it seems Genesis (or holdco DCG?) is forced liquidating GBTC to stave off bankruptcy
And it all could have been prevented with an SEC ETF approval.
Of all the blood on the @SECGovs hands in this crypto blow-up, I think this might be the worst.
It's just so simple to have prevented all of this from ever happening.
If GBTC was an ETF, there never would have existed a premium to arb.
If there was no premium to arb, all this leverage and risk wouldn't have been taken trying to arb it.
Instead, retail investors got screwed every step of the way.
Retail investors that bought GBTC at a premium (before Q1 2021) effectively bought 3AC's yachts for them, and are now ~70% underwater relative to NAV.
Retail investors that bought GBTC at a discount after Q1 2021 have suffered even larger losses than spot BTC holders.
And a lot of the drawdown has been caused by the leverage the SEC perpetuated by not approving an ETF conversion.
Worst of all will be if GBTC gets wound down, and retail investors that own it in IRAs and accounts where they can't hold spot, get stopped out at cycle lows.
Alas...retail investors with the wherewithal might be able to have the last laugh.
The irresponsible institutions seem to have been completely wiped out here and are liquidating (hopefully) the last of their GBTC.
The discount to NAV is close to 50%.
If you have a positive view on BTC and want long-term exposure, and can hold through this vol and thru to an eventual ETF approval (which I have to think is extremely likely), I think GBTC offers a compelling way to express that view here.
Not your keys, and so regulatory risk is >>> than self-custodying spot BTC.
But, for the risk, you can buy BTC for 50% off via GBTC.This post is based on this twitter thread.