Could Bitcoin ETN’s Large Premium to BTC be a Sign of Institutional Buying?

Over the past year discussions of a Bitcoin ETF being approved by regulatory authorities in the US has dominated the news cycle and has even – on multiple occasions – impacted the markets. Many investors and analysts believe that the approval of a BTC ETF will lead to an influx of investors as it would place the cryptocurrency in front of all traditional equity investors.

Although the status and potential effect of a Bitcoin ETF remains unknown, there already exists and exchange-traded product that allows investors to add some exposure to Bitcoin’s price through the form of an Exchange Traded Note (ETN).

Bitcoin ETN Trades at Large Premium to BTC

The Grayscale Bitcoin Trust (GBTC) is a popular ETN that allows traditional investors to gain some exposure to the daily price movements of Bitcoin without actually owning the underlying asset.

Grayscale describes their product as “the first publicly quoted securities solely invested in and deriving value from the price of bitcoin” that allows investors to “gain exposure to the price movement of bitcoin through a traditional investment vehicle, without the challenges of buying, storing, and safekeeping bitcoins.”

Each share of GBTC trades at approximately 1/1000th of Bitcoin’s actual price and is currently trading at $4.82 per share. This means that GBTC is valuing one BTC at $4,820, which is significantly higher than Bitcoin’s current price of under $4,000.

Thomas Lee, the co-founder of Fundstrat Global, pointed out this premium in a recent tweet, hypothesizing that GBTC’s premium to BTC’s net asset value (NAV) is a sign of institutional buying, as purchasing GBTC is easier than purchasing BTC through a cryptocurrency exchange for traditional investors.

“CRYPTO: $GBTC premium to NAV creeping up to 36% on heels of $BTC surge to ~$4,000… Rise in premium is a sign of institutional net buying (easier to buy this ETN from @GrayscaleInvest than buy via a crypto exchange) … another sign 2019 way better than 2018 for crypto,” he explained.

CRYPTO: $GBTC premium to NAV creeping up to 36% on heels of $BTC surge to ~$4,000 Rise in premium is a sign of institutional net buying (easier to buy this ETN from ⁦@GrayscaleInvest⁩ than buy via a crypto exchange)… …another sign 2019 way better than 2018 for crypto pic.twitter.com/hdFh8y3sY9 — Thomas Lee (@fundstrat) February 19, 2019

Although GBTC doesn’t entitle buyers to Bitcoin – the underlying asset it tracks – it does allow buyers to get in on some of its volatility in an easy to access fashion.

Is Growing GBTC NAV Premium Actually The Result of Institutional Buying?

On February 17th Bitcoin’s price surged after briefly dipping towards $3,600, and is now pushing up against $4,000, which has proven to be a level of resistance.

Historically, GBTC’s premium grows whenever BTC experiences price surges, and drops whenever Bitcoin’s price drops. With this being said, it appears that GBTC historically exaggerates Bitcoin’s sentiment shifts, which does not serve as strong support for Lee’s theory regarding the growing premium being the result of institutional buying.

Furthermore, Lee’s assessment of GBTC’s current NAV premium is exaggerated, as Bloomberg notes that GBTC’s current premium is just under 19%, while its average 52-week premium is nearly 40%.

Lee addressed this in response to a comment on his original post, noting that a 20% NAV premium does appear to be more accurate.

Hmmm. Actually more favorable — Thomas Lee (@fundstrat) February 19, 2019

With that being said, although it is possible that institutions are trading the cryptocurrency via GBTC, there is little evidence of this and its current price premium is nothing extraordinary.

At the time of writing, GBTC is trading up nearly 15% from its opening price, while BTC is only trading up 1.5% over a 24-hour trading period.