Buying frenzy puts some Grayscale crypto funds at ‘absurd’ premiums

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Some cryptocurrency funds run by the world’s largest crypto manager are trading at as much as eight times their underlying value amid an unprecedented buying frenzy. The sharp price gains are the latest sign of the passing of the “crypto winter”. The price of bitcoin has jumped to a 20-month high of $42,000 amid expectation of the imminent launch of US exchange traded funds directly tracking the world’s largest digital token. The mania has spread to a host of private trusts operated by Grayscale. The company’s Filecoin Trust is trading at $34.25, 721 per cent above its net asset value of $4.17, having hit a premium of more than 1,000 per cent in November. Its trust-tracking solana, the third-largest cryptocurrency after bitcoin and ether, is at a premium of 302 per cent, while those investing in chainlink, livepeer, lumens and Decentraland’s mana token are priced at between twice and four times their NAV. “It’s absurd. I feel the investor doesn’t really understand what they are getting into,” said Bradley Duke, chief strategist of ETC Group, which runs more than $1bn in European-listed crypto exchange traded products. “I wouldn’t know what [investors] could be thinking buying at these prices,” said Bryan Armour, director of passive strategies research, North America, at Morningstar. “A lack of understanding can easily be part of it.” The funds can only be traded via the over-the-counter “pink sheets” market, where secondary trading in pre-existing shares takes place. Shares cannot be redeemed, while new shares can only be created if Grayscale carries out a private placement exercise, meaning there is no arbitrage mechanism to bring prices back in line with the underlying holdings. However, most of the premiums only emerged, or widened sharply, in November, coinciding with a rally in the price of many cryptocurrencies. “There is a very strong appetite for crypto products at the moment as the crypto winter has melted. Investors are allocating to crypto in larger allocations and also diversifying from bitcoin and ethereum,” said Michael Sonnenshein, chief executive of Grayscale. He believed some investors may be willing to pay well over the odds for Grayscale’s trusts in order to access cryptocurrencies “through a product wrapper that is known to them, is familiar and gives them added protections that they are used to seeing when they invest in any other asset”. The alternative is to trade via an unregulated crypto exchange. For many of these tokens, Grayscale’s funds are the only regulated products available to US retail investors. “Because there are so few regulated products out there, the investors who don’t want to, or can’t, invest directly in these assets have little choice,” said Duke. “As a result, these products end up trading at these huge premiums. It’s a function of the structure of the products.” “I guess it’s down to accessibility,” said Armour, although he added that cryptocurrencies “have such high volatility it might be [that investors] don’t even care” at what price they are buying. Another contributory factor may be limited liquidity, given the small size of some of the trusts. The Filecoin Trust has assets of just $464,000 and the solana vehicle, the largest currently trading at a significant premium, at $10.8mn. “These are fairly illiquid products and, as solana spot has seen, these illiquid products are seen as proxies by those who can’t buy solana directly in their funds or prefer not to,” said Gautam Chhugani, senior analyst, global digital assets at AB Bernstein. Duke argued that the large departures from net asset value showed the benefit of the European model. According to this, in contrast, scores of exchange traded products that invest directly in a rich array of cryptocurrencies — including those operated by ETC Group — “track the underlying almost perfectly”. They are analogous to ETFs in the US but need to call themselves ETPs because they fail to meet European Ucits regulations on portfolio diversification. The Securities and Exchange Commission has so far not permitted any such “spot” cryptocurrency ETFs in the US. Instead it only allows ETFs that invest in the futures market. Expectation is widespread that BlackRock and rival operators will be given the green light early next year. “Without regulated products these kinds of [price] anomalies are likely to exist,” Duke said. “I think we are very lucky in Europe . . . the ETP wrapper is far more efficient with the ETPs trading at or very close to NAV.” In contrast, the US private trust structure “is problematic. And Grayscale recognise it’s problematic,” he added. Grayscale has fought a long battle with the SEC to allow it to convert its flagship Bitcoin Trust (GBTC), at $24.1bn the world’s largest bitcoin fund, into an ETF. In August, a federal appeals court in Washington DC ruled that the SEC was wrong to reject Grayscale’s application to convert GBTC. Although this trust still trades at a discount to NAV, this discount has narrowed to a 28-month low of 8.7 per cent — from a nadir of almost 50 per cent in December 2022 — in anticipation of the likelihood of Grayscale being given the go-ahead to convert it into an ETF. The company has also filed with the SEC to transform its $6.2bn Ethereum Trust (ETHE), again the largest such vehicle in the world, into an ETF. This trades at a discount of 14.6 per cent, a far cry from the near-60 per cent level seen at the turn of the year. Sonnenshein said that, in the fullness of time, he would like to see the rest of Grayscale’s 17-strong product suite follow suit. “The goal would be to uplift all these products to ETFs,” he said.

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