Grayscale Investments is one of the biggest Bitcoin holders in the world. The company, which provides an interesting alternative investment method for crypto enthusiasts, has been one of the many beneficiaries of the Bitcoin boom of 2020.
However, Grayscale itself could now be the catalyst for a new Bitcoin low as its investment strategy appears to have aligned with the current market downturn in a bad way.
How Does Grayscale Investments Work?
Grayscale is the crypto industry’s largest asset management firm. The company operates by allowing high-net-worth individuals to pool funds together into a cryptocurrency trust, which it uses to purchase massive amounts of the asset in question. Then, Grayscale lists the trust on public exchanges, allowing anyone to trade shares in it. The share will track Bitcoin’s price, but not entirely.
Unsurprisingly, Grayscale’s Bitcoin trust is the most popular of its cryptocurrency trusts. Institutional investors can gain exposure to the asset using the trust. Many purchase shares via Grayscale in daily private placements by either making payments in the dollar or the Bitcoin.
However, investors can sell off their shares in the Bitcoin trust to other parties in secondary markets. This can only happen after they’ve completed a six-month lockup period. Many investors anticipate the ability to liquidate at a premium if the market price at the time of their sale exceeds the price when they bought in.
On the flip side, liquidating shares of the Bitcoin trust when the market price is lower than the price at their entry means that investors will lose. If they do decide to liquidate their holdings, they would be doing so as a measure of financial risk management - especially since prices are hovering around comfort points for now.
A Selloff Could be Coming
July will be an unlocking period for Grayscale investors. This means that many of them will have the opportunity to sell off their holdings in the Grayscale Bitcoin trust. The unlocking period officially comes soon, with about 40,000 BTC - worth about $1.6 billion in nominal value - being unlocked. The rest of these unlocks will be on July 18, when 16,240BTC will be available to investors.
The current batch of shares consists of those locked at the start of Q1 2021. With a value of almost $600 million, it is the largest unlocking of Bitcoin trust shares in the history of Grayscale.
Some analysts have pointed to the unlocking event as being a bearish signal for Bitcoin and its price. The premise is that accredited investors will sell at least a portion of their Bitcoin trust holdings when the unlocking period comes. In a note to clients, Nikolas Panigirtzoglou, the lead strategist at JPMorgan, reportedly wrote:
“Despite this week’s correction, we are reluctant to abandon our negative outlook for Bitcoin and crypto markets more generally. So despite some improvement, our signals remain overall bearish.”
Of course, this premise is understandable. The investors who pledged funds into the bitcoin trust at the beginning of the year did so when Bitcoin was about to cross $30,000 for the first time. They enjoyed it as Bitcoin broke multiple thresholds and hit an all-time high of $64,000. But, they also saw the asset’s price move on the downtrend once more.
So, many of them could quickly want to sell out of their Bitcoin holdings to protect themselves. This minor selloff could affect Bitcoin’s price, even more, triggering another panic that will lead to a further selloff.
Kraken Disputes Negative Claims
While JPMorgan believes that the selloff could trigger a price downturn, Kraken - one of the top exchanges - believes otherwise.
In a recent report, the company pointed to the market’s current structure, adding that the unlock won’t weigh so much on Bitcoin’s price anytime soon - if at all. Citing filings with the Securities and Exchange Commission, Kraken claimed that most of the shares to be unlocked are owned by large institutions that bought Bitcoin trust shares to enjoy the premium-to-net-asset value that the shares traded.
Also, there’s a probability that these investors shorted Bitcoin in the futures markets to reduce the impacts of negative price movements. There are even investors that might have tried to arbitrage the Bitcoin trust’s premium. These people could keep holding onto their shares instead of selling in the secondary market.
Whatever happens, the market will watch on in anticipation as Grayscale Bitcoin trust shares finally get liquidated. This could be the trigger for a drop below $25,000, or it could be an opportunity to see how many institutional investors believe in Bitcoin.