Grayscale'due south Bitcoin Trust shares (GBTC) are currently trading at $7.49 per share, a 15.81% premium of Bitcoin. GBTC is the kickoff publicly quoted security "solely invested in and deriving value from" Bitcoin and since listing information technology has been known to trade at a high premium, having hit a 2022 high of 41.42% on Feb. 18. The premium is ordinarily accentuated when prices are loftier.

The GBTC-BTC premium has dropped by over 30% since February this year, following Grayscale'south registration as a reporting visitor with the U.s. Securities and Exchange Commission as well as another private placement of its shares in February.

The Bitcoin price (BTC) is currently sitting at $7,058, having rallied by 21% in the last month. Although a pullback is still possible, Bitcoin price has recovered from the March thirteen crash, and the reduced premium between GBTC and BTC is yet another bearish sign for Bitcoin as market sentiment continues to point toward farthermost fear amongst investors.

GBTC Premium or Discount to NAV

GBTC Premium or Discount to NAV. Source: YCharts

Low institutional appetite?

The falling premium betwixt GBTC and the Bitcoin price can be interpreted as a sign of reduced appetite from institutional investors who, according to Grayscale, make upwardly fourscore% of its customer base for the Bitcoin Trust.

This perspective could be further backed by the lowered volumes in the CME regulated futures market which in March saw a 44% decrease from the previous month. This is despite volumes increasing in unregulated derivatives markets and in spot markets alike.

Still, Grayscale has seen increased involvement from institutional investors having reported investments reaching a record-breaking $171.vii million during a single month of individual offerings in 2022. While the coronavirus and the Blackness Th crash may have shaken the market, Grayscale currently manages $2.one billion in assets for GBTC and other developments like Qi3'southward Bitcoin fund show that in that location is still institutional demand to exist filled.

GBTC Cumulative weekly investment - 2022

GBTC Cumulative weekly investment - 2022. Source: Grayscale

At that place are other factors to consider in gild to empathise the GBTC-BTC premium and why it seems to be dropping always lower. While the premium is generally accentuated or decreased in bullish or bearish markets, the dynamic of the GBTC premium may be changing permanently.

Increasing liquidity for GBTC

GBTC offers periodic individual placement rounds that are available to accredited investors. In previous offerings, investors had a ane-year lockup menses during which shares could not be sold since the products were not registered with the SEC.

Afterwards this period, investors could sell shares in over-the-counter markets, given that Grayscale does not provide a redemption service for the underlying native asset.

This organisation creates a liquidity bicycle and increases selling pressure one year afterward each private placement event. Coinmetrics co-founder, Nic Carter, pointed this out in a Jan tweet. Carter wrote:

"I'd exist willing to bet that the GBTC premium will be crushed to single digits on the week of July xv 2022 and October 21 2022."

Yet, while Carter's ascertainment holds true, the date may come sooner than expected every bit Grayscale's registration as a reporting company with the SEC would grant its products a reduced lockup period of half-dozen months. This could possibly event in increased liquidity and reduced premiums.

Hedge funds and risk-gratuitous arbitrage

Although GBTC is also available to retail investors, Grayscale'due south contempo report shows that overwhelming involvement comes from institutional investors, particularly hedge funds.

According to Keegan Toci, Partner at Vertical Ascent Capital Direction, accredited investors accept an excellent opportunity to short GBTC at a premium, buying it back at a discount for the NAV price in which private placement events are priced.

The selling pressure created by arbitrage, along with the possibility for early liquidity provided by the SEC registration and negative sentiment in the market have created the perfect storm for GBTC's falling premium.

The "days of high premiums are over"

While the premium in GBTC has normally increased after private placement events and especially during Bitcoin price rallies, it's possible that the GBTC and Bitcoin price will see a narrower gap from now on. As new options for institutional investors appear in the marketplace, competition may drive these premiums down.

According to Nic Carter:

"I notice it extremely plausible that in a flat market 100s of millions in sales of GBTC (look at the subscription book) would crush the premium. plus, at that place'due south many other ways to get exposure to BTC than GBTC these days. days of high premium are over."

As options for institutional exposure to the Bitcoin price continue to widen, 1 thing seems to be articulate: the infrastructure required for the long-awaited institutional nail continues to go more robust and diverse.

Although the coronavirus has instilled fear in investors, Bitcoin may hold true as a store of value, much like gold, and the upcoming halving may jumpstart still another bull rally for Bitcoin and pave the way for increased institutional interest.