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Betting on the $BTC Bottom Fishing? (Op-Ed)

The ultimate trade for BTC bottom fishing?

Long GBTC vs. Short CME BTC Futures

🧵👇

As of 24 Nov, Grayscale holds ~633,360 BTC, valued at ~10.47B. In the open market, GBTC shares last traded around 9.23 (@IBKR giving a market value of ~6.36B or a NAV discount of ~39.2%.

Market Cap of GBTC: ~6.36B NAV: ~10.47B Discount: ~39.2%

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Why does the discount exist in the first place?

We believe that it is a structural issue associated with the workings of the trust.

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GBTC is currently a trust, not an ETF. It doesn’t have a redemption mechanism to balance out the outstanding shares to its NAV holdings by selling BTC to close out the discount.

Simply put, the discount exists because the supply of the shares > the demand.

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To make matters worse, Grayscale has refused to provide proof of reserves, citing “security concerns”. They released a statement that all digital assets are stored under Coinbase Custody Trust Company.

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The GBTC discount is currently near its ATH at 45%. Betting on the discount to converge would payoff in 2 scenarios:

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Scenario 1️⃣:

@Grayscale gets approval from the SEC to complete a special redemption for Genesis or DCG to meet its liquidity crunch. Of the 2 scenarios, we deem this as less probable given SEC’s refusal to approve spot Bitcoin ETF.

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Scenario 2️⃣:

The crypto market recovers and the CeFi credit crisis gets relief after revaluation of crypto financial institutions’ assets.

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For those that believe the crypto market is near the bottom, betting on this NAV discount to narrow in theory could be a higher Sharpe Ratio trade than an outright long BTC trade.

The question is how to play this SAFELY? 🤔

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One way to bet on the discount narrowing can be conducted via a more established TradFi market route, steering clear of crypto CEXs and counterparty risks.

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This is where CME BTC futures come in. @CMEGroup currently offers regular and micro BTC futures contracts in denominations of 5 BTC and 0.1 BTC respectively.

Regular:

Micro:

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Given CME has a much longer track record than any crypto CEX, dealing in its futures minimizes credit risk.

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How to execute this trade? Assuming 50 BTC exposure, 54.7K shares of GBTC + 462K principal are needed based on 8.44 share price. To short 50 BTC in CME futures, you need a short of 10 regular contracts - depending on an expiry that requires 210K maintenance margin.

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Depending on your broker, you can either put up full cash as collateral for the short futures leg, or use the GBTC shares as margin (most likely a haircut will be applied) to be more capital efficient.

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What are the risks? Since GBTC doesn’t have redemption, there’s no fixed date where this trade guarantees to pay. As market sentiment fluctuates, the trade's mark-to-market (MTM) P&L will corresponds to GBTC NAV discount changes. This might deepen, causing negative MTM.

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Due to the current backwardated term structure and potential rolling costs, tenor selection may cause complications. There’s also a tiny risk that GBTC’s pricing source (XBX) differs significantly from CME’s (BRR), causing further MTM pain.

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Moreover, there is no guarantee that GBTC discount will narrow in the absence of a catalyst. In the near term, uncertainty surrounding sibling company, Genesis as well as the ongoing crypto market volatility will likely weigh down on its price.

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In conclusion, dislocations and mispricings often emerge during periods of high volatility and fear.

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