Why Does Grayscale Seldom Sell Bitcoin?

KEY TAKEAWAY

  • We examine the structure of Grayscale Bitcoin Trust (GBTC), and reveal why buyers through private placement must hold GBTC shares for at least six months.
  • The termination of the redemption program and the lack thereof render GBTC an important marginal buyer in the crypto market.
  • GBTC has already bought 94,940 Bitcoins in the first five months of 2020, which is more than its purchases in 2018 and 2019 combined.

We discussed the structure and restrictions of Grayscale Ethereum Trust (ETHE) and Grayscale Bitcoin Trust (GBTC) in “Why are Investors Paying a 400%+ Premium on ETH?“. We recently got asked why GBTC’s Bitcoin holding decreased on May 27 (albeit by only 18 Bitcoins). We’ll explain it in more detail in this article.

GBTC structures its share units through private placement, which is designed for accredited investors. The term “restricted securities” outlines the intrinsic characteristics of the GBTC shares, which bear a “restrictive” tag reiterating that traders may not resell them in the public marketplace unless exempted by the SEC.

Restricted securities are distributed through offerings outlined in Rule 144(3), which includes private placement offerings, Regulation D offerings, employee stock benefit plans as compensation for their professional services, or in exchange for providing “seed money” or start-up capital to the company.

Rule 144 under the Securities Act of 1933 delineates specific conditions for exemption from selling restricted securities. These conditions include a six-month or one-year holding period and the removal of the “restrictive” tag by a transfer agent under the issuer’s written consent.

Previously, the minimum holding period of GBTC was 1 year. According to Rule 144, restricted securities issued by a SEC reporting company are subject to a minimum holding period of only 6 months. GBTC became an SEC reporting company on January 21, 2020 and the holding period requirement got reduced from one year to six months on April 21, 2020.

Please note, after a six-month holding period, a GBTC investor via private placement is allowed to sell GBTC shares in the secondary market to other investors. It’s not to sell Bitcoin holdings by the GBTC shares.

Source: GBTC Press Release

GBTC used to run a redemption program. However, the program was terminated due to the violation of Rules 101 and 102 under Regulation M.

Prior to October 28, 2014, Grayscale Trust investors could redeem through Genesis, an affiliate of Grayscale Trust and the sole authorized participant. This arrangement was found to violate Regulation M and thus was stopped.

Rule 101 of Regulation M prohibits any “distribution participants” and its “affiliated purchasers” from bidding for, purchasing, or attempting to induce any person to bid for or purchase, any security that is the subject of a distribution until after the applicable restricted period, except as specifically permitted in the Rule. Rule 102 of Regulation M includes the same prohibitions but applies to issuers, selling security holders, and any of their affiliated purchasers.

For the time being, the trust is not operating any redemption program. Subject to regulatory approvals and the Sponsor’s approval in its sole discretion, Grayscale Trust may reopen the redemption program in the future. Despite the said possibility, GBTC currently shows no intention of seeking regulatory approval for that.

Without a redemption program, GBTC essentially can only purchase Bitcoin but not sell it. The only scenario that GBTC sells Bitcoins is to cover trust fees and expenses.

According to Grayscale financial statement, GBTC sold 3,469, 3,843, and 4,641 Bitcoins to pay fees in the years of 2017, 2018 and 2019, while buying 7,213, 32,281, 61,555 Bitcoins in these three consecutive years.

GBTC bought much fewer bitcoins in 2017 because it ceased issuing shares through private placement transactions prior to the initial filing of the registration statement on Form S-1 with the SEC. On October 25, 2017, the Trust withdrew its registration statement (File No. 333-215627). GBTC resumed offering shares in private placement transactions exempted from SEC’s registration requirements on December 4, 2017.

In 2020 year to date, GBTC has bought 94,940 Bitcoins, surpassing the sum of its purchases in 2018 and 2019. This renders GBTC a powerful force to be reckoned with in the crypto market.