Foreign What's up guys! and welcome back to Wall Street Millennial On this channel, we cover everything related to stocks and investing. The 2008 Financial crisis taught us all how dangerous Financial contagion could be. After Lehman Brothers collapsed, hundreds of their counterparties were pushed to the brink of bankruptcy, ultimately leading to the worst economic downturn. Since the Great Depression the collapse of FCX is starting to cause a similar domino effect in the crypto industry.

The Grayscale Bitcoin Trust is a closed-ended fund that owns about 10 billion dollars worth of Bitcoin. It trades on the over-the-counter markets under the ticker symbol Gbtc. The single largest holder of Gptc is Kathy Woods Ark Invest, which owns about 51 million dollars of it in their Arc W Next Generation Internet. ETF Given the state of the crypto markets, it's unsurprising that Gbtc has not been having a great year in 2022, with its price down 77 year-to-date But what is surprising is that Bitcoin is only down 65 percent in the same period.

So what gives? Each share of Gptc represents a ownership of .0009 Bitcoins At the time of recording this video, the price of Bitcoin was about seventeen thousand dollars per coin. This means that each Gbtc coin should in theory be worth about fifteen dollars, but they're trading for slightly less than eight dollars. In fact, over the past five years, Gptc has massively underperformed. Bitcoin.

If you bought one Bitcoin five years ago today, you would be up thirty percent. If you bought one share of Gbtc, you'd be down 64 percent. On its very own website, Gptc advertises itself as a security solely invested in and deriving its value from the price of Bitcoin. If this is the case, how has it underperformed Bitcoin by more than 90 over the past five years? In this video, we'll look at what exactly is going on with Grayscale, how it is related to the FTX collapse in what is in store for Gbtc going forward.

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There are hundreds of interesting business ideas you would never have thought of that Trans delivers to your inbox every week. You also get access to a network of thousands of like-minded entrepreneurs on the Trans community and Live Q A events hosted by industry experts. Quality wise, these events are similar to MBA lectures, but instead of paying tens of thousands of dollars for some fancy degree, you can get started for just one dollar. Take advantage of this special offer you can only get on this channel To start your 7-Day trial, go to Trends.co WSM That's Trends.co WSM To start your seven-day trial for just one dollar Grayscale Investments was founded in 2013 by Barry Silbert, a financier who became interested in Bitcoin in 2012.

Barry thought that Bitcoin had huge potential to disrupt the traditional Financial Industries He also saw that most institutional investors shunned the digital coin because there were no regulated exchanges to buy it on at the time. That's where Grayscale Investments comes in. They are an asset management firm solely focused on cryptocurrencies. In 2015, Greyscale launched the Grayscale Bitcoin Trust, which we will Hereafter refer to as Gptc.

Gptc was the first ever closed-ended fund that invests solely in Bitcoin Shares of Gbtc trade on the over-the-counter market. Now, people who can't buy Bitcoin directly were able to gain exposure to Bitcoin by buying shares of Gbtc. This sounds a lot like an ETF. You can buy shares in an ETF like the Spy to gain exposure to the S P 500 without the hassle of buying the 500 constituent stocks.

However, Gbtc is not an ETF. We'll get into why this distinction is so important. In a moment, let's look at the Spy ETF which tracks the S P 500. One share of the Spy represents tiny ownership stakes in each of the 500 constituent companies.

If you add up the value of these 500 Holdings, you get the net asset value of the ETF. Let's say the net asset value is 100 per share. If each share of the Spy traded for one hundred dollars, there is a zero percent premium to Nav. If the share price of one share of Spy was 101 dollars, there would be one percent premium to Nav.

And if each Sheriff's Buy trade for 99, there would be a one percent discount to Nav. If you look at the premium or discount of the Spy, it always stays Within in a tiny fraction of one percent. And this is not an accident. By the very nature of the ETF structure, it's almost impossible for the share price to diverged significantly from the net asset value.

This is because the ETFs are open-ended Let's go back to the example where Spy trades for 99 per share while the Nav is 100. In this case, the issuer can buy one share of Spy on the open market for 99. They can then immediately proceed to liquidate it into its constituent parts and sell them for a total of one hundred dollars. This gives them a one dollar profit.

If Spy traded at a premium, they would do the opposite. They would buy the constituent components for one hundred dollars, create a new share of Spy, and sell it for 101 also making a one dollar profit. Thus, any premium or discount to Nav is almost immediately arbitraged away. Gptc is not an ETF.

It is a closed-ended fund. This means that Grayscale is not able to freely create or redeem shares. Because of this, its share price can diverge substantially from its net asset value, And throughout its history, it has. Many investors such as Kathy Woods, Arc and Vest are not able to buy Bitcoin directly for either regulatory or technical reasons, so they buy shares of Gbtc instead.

At the peak in 2017, Gbdc traded at a roughly 130 premium to Nav. This is the functional equivalent of 100 bills trading for 230 dollars. However, this premium was not sustainable. While Gbtc is not an ETF, there are still mechanisms by which the premium can be arbitraged away.

Like, credited investors are allowed to deposit Bitcoins into the trust and receive shares of Gbtc in return. There is a six-month lockup period. After this, they're free to dump the shares on the open market for a quick profit. Remember that only accredited investors are allowed to do this.

This was effectively a massive transfer of wealth from retail investors to wealthy investors and hedge funds. Think of Robin Hood in Reverse. This Arbitrage trade became extremely popular in 2020 and 2021. The inflows from institutional investors massively increased Gbtc's Bitcoin Holdings, which increased to 649 000 by February of 2021..

this is more than three percent of all Bitcoin in circulation globally. The massive increase in the number of Gbtc shares outstanding caused the premium to shrink and eventually turn to a discount. and while it was relatively easy for investors to put money into the fund, it has thus far been impossible to take any money out. Gptc has no mechanism to liquidate its shares into Bitcoin.

Because of this, there's no way for shareholders to withdraw big going out of the phone. After Gptc started trading at a discount, no new investors deposited any more. Bitcoin The number of coins decreased gradually as a result of the two percent management fee Grayscale charges. On the surface, Gbtc almost seems like a scam.

You can only put money in, but never take money out, and Greyscale will take their two percent management fee and perpetuity. So why were investors willing to deposit 10 billion dollars into it? The idea was that grayscale would eventually convert itself into an ETF. Once this happens, the price will almost immediately converge to net asset value, minting massive gains for anyone who bought shares at a discount. One person who thought this was a good idea was Three Arrows Capital Founders Suzu.

Starting in 2021, Suzu started prolifically tweeting about Gbtc's discount to Nav. At the time, it was trading at a roughly 10 discount. If it were converted to an ETF, he could bag an easy 11 gain. But Three Arrows Capital is targeting much higher returns than this, so he borrowed money and a lot of it.

Three Arrows Capital Borrowed money from many different crypto lenders, including more than one billion dollars from the company called Genesis trading unlike consumer-facing platforms like Blockfi, and Celsius Genesis is for institutional investors, hedge funds High net worth individuals and other large investors can lender borrow crypto on the Genesis platform, they also partnered with Gemini a crypto brokerage founded by the Winklevoss twins. Gemini borrows crypto from users with its earned feature, but Gemini doesn't have the expertise or infrastructure to lend this money out on their own, so instead they lend it out to Genesis Global, which functions as a middleman. The relationship between Genesis and Gemini would eventually cause Gemini to Halt withdrawals for its own feature in November as a classic case of financial contagion, but we'll get more into that later. Genesis is best understood as an unregulated bank that works with cryptocurrencies and offers yields as high as 10 percent.

The main difference is that Genesis is unregulated and its deposits are not FDIC insured. Where it gets even more interesting is that Grayscale, Investments Genesis, as well as the Crypto Media Company Coindesk and Crypto Exchange Luno, are all owned by the same parent company, Digital Currency Group which is run by founder Barry Silbert. This created an interesting situation where one subsidiary of Genesis was lending money to Three Arrows Capital which used that money to buy securities issued by another subsidiary of Grayscale. Investments Throughout 2021 and early 2022, Three Arrows Capital accumulated a massive leverage position in Gbtc and it looked like things were going their way in.

May Of 2022, the SEC approved a Bitcoin Futures ETF for the first time ever. Bitcoin features ETFs do not own any actual Bitcoin. They instead hold Bitcoin Futures contracts which exactly replicate the spot price of Bitcoin. If the SEC was willing to approve a Bitcoin Futures ETF it seemed all but guaranteed that they would approve a Bitcoin spot ETF Like Gbtc because they are functionally identical.

but inexplicably, the SEC rejected Greyscale's application to turn Gbtc into an ETF because the Bitcoin spot Market is unregulated, the SEC says that there is a high risk of Market manipulation, but because Bitcoin Futures are already regulated by the Cftc, Futures ETFs are supposedly much safer. Long story short, the ETF was rejected on a technicality. This ruling caused Gptc's discount to increase even further. Remember that Gbtc is basically worth if it can be converted into an ETF because there is no way for shareholders to redeem the coins.

It doesn't matter if the fund has 10 billion or 10 trillion dollars in it, if you can never access the money, it's effectively worthless. This was a major disaster for Three Arrows Capital This, along with a disastrous investment in Terra Luna caused the multi-billion dollar hedge fund to implode. They defaulted on 1.2 billion dollars of loans owed to Genesis which would have put the company on the brink of bankruptcy. In order to save the subsidiary, Digital Currency Group effectively bailed out Genesis by transferring 1.2 billion dollars of liabilities from the subsidiary to the parent company.

This put the parent company in a more precarious financial position and things were about to get even worse: Genesis Trading had deposited 175 billion dollars into FTX When FTX imploded, they were unable to access these funds without this money Genesis had to Halt withdrawals. raising questions about its solvency Shortly after the decision to Halt withdrawals Digital Currency Group CEO Barry Silbert sent a letter to shareholders explaining the situation. He said that the parent company had two billion dollars of debt, including 575 million dollars it borrowed from its subsidiary. Genesis He said they used this money to buy back stock.

This means that the parent company Digital Currency Group, was both borrowing and lending money to its subsidiary. Genesis These types of complicated and seemingly redundant transactions never looked good from the corporate governance perspective. But anyway, this video is not about Genesis it's about Gbtc. Almost immediately after the FTX situation began, the price of Gbtc started decreasing in its discount to Nav started widening.

As of the time of recording this video, the discount currently sits at 49. Grayscale is a separate subsidiary than Genesis. Even if Genesis goes bankrupt, it shouldn't have any direct impact on Grayscale or Gptc. One potential reason is the fear to regulatory backlash against the crypto industry as a whole.

With so many high-profile crypto disasters in 2022, the SEC is likely to become even more conservative when it comes to approving new crypto investment vehicles such as a spot. Bitcoin ETF It could also be the case that after losing more than 75 percent of their value, Gbtc investors are finally throwing in the towel and giving up all hope This video is not Financial advice, but I Personally wouldn't touch Gbdc with a 10-foot pole. While the 49 discounts at Nav may look attractive, there is still the risk that the SEC never approves the ETF conversion and the whole thing becomes effectively worthless. All right guys, that wraps it up for this video.

What do you think about the Digital Currency group in Gbdc? Let us know in the comments section below. As always, thank you so much for watching and we'll see in the next video. Wall Street Millennial Signing out.