Fri. Oct 23rd, 2020
bitcoin

Crypto is marginally positive today while spot volumes remain depressed. Many OTC desks are reporting summer-doldrum-like interest in crypto markets these days.

Crypto-trust company Grayscale Investments announced the company had received FINRA approval to list its Bitcoin Cash (BCHG) and Litecoin (LTCG) trust products on the U.S. over-the-counter (OTC) market. The announcement is an incremental development for crypto infrastructure but the products aren’t without their faults. Grayscale operates trust products which collect investor capital and invest passively in various cryptocurrencies. The BCHG product currently holds USD 5.8 million in assets under management (AUM) and the LTCG 2 million in AUM. Both vehicles charge 2.5% annual management fees. They join the company’s BTC product, Grayscale’s largest product, as the only other listed trusts of the 10 the company offers.

Nonlisted products have at least a year lock-up and liquidity events are organized by private sales. The OTC markets will now serve as a sort-of bulletin board in organizing those sales. It’s unclear why the company is launching/received approval for the BCH and LTC products instead of their ETH and XRP products, which are larger. One idea is that it may have to do with the uncertain regulatory status of ETH and XRP while BCH and LTC, as Bitcoin forks, are typically seen as less likely to be classified as securities.

We generally agree with the premise that has driven these trust products. Being that, professional investors have little interest in developing their own crypto infrastructure, such as wallets, and prefer cash-settled synthetic exposure to the space. That said, the trust model has plenty of quirks and faults. The most obvious is that, unlike an ETF, there’s no method for market-makers to collapse their positions at the fund’s NAV every-day. With that arbitrage mechanism absent, the company’s Grayscale Bitcoin Trust (GBTC) has consistently traded at a premium to NAV and at times has broken its correlation with the underlying altogether. 

GBTC vs BTC – The imperfect correlation between the Grayscale Bitcoin Trust (candlestick) and BTC/USD (blue)

Furthermore, in addition to the high management fees, there’s little transparency around purchases of crypto and therefore NAV markings. Purchases, usually occurring through OTC desks, have no checks around best execution or other measures that would be expected with, for example, a traditional ETF. We take the fact that these suboptimal products continue to grow as a sign that larger investors continue to look for a more broad suite of regulated investment vehicles to participate in the space.

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