Grayscale trusts are investment vehicles that provide investors with crypto investments opportunities without the need to handle the asset's custody personally. Due to the closed structure of the trusts, significant premiums have formed in recent weeks for Filecoin, Solana, Decentraland, and others.
The investment trusts of the Grayscale Group have been offering institutional and private investors the opportunity to invest in cryptocurrencies through traditional financial instruments as early as 2013. This was quite ahead of its time for the sector, as the SEC only approved the first publicly traded Bitcoin ETF in 2021. Up to date, Grayscale has raised assets worth over $30 billion through these trusts. The given amount can be misleading, since the cryptocurrency prices are not always accurately reflected.
Closed funds lead to price discrepancies
Grayscale trusts are generally based on individual cryptocurrencies such as Bitcoin (BTC) and Ether (ETH), as well as alternative assets like Solana (SOL), Chainlink (LINK), and Filecoin (FIL). The Grayscale trusts are considered as closed investment vehicles. Shares cannot be freely created or redeemed by buyers. Only accredited investors have access to the primary market, which includes a six-month lock-up period before activation on the secondary market. Historically, this has led to price differences between the trust and the spot prices of the respective cryptocurrencies.
The most known case is the high premium and subsequent discount of the Grayscale Bitcoin Trust (GBTC). Until 2021, GBTC was one of the only Bitcoin products that retail investors could easily invest in. Consequently, a premium formed compared to the spot price. The premium sometimes exceeded 40% and crypto funds like Three Arrows Capital attempted to capture this premium through a quasi-arbitrage business. Investors bought spot Bitcoin, exchanged their cryptocurrencies for shares in the trust, and sold the GBTC after six month lock-up period. The premium gradually closed, and some now insolvent parties sold their shares at a loss with the discount only diminishing when the prospect arose of converting the Grayscale Bitcoin Trust into an ETF.
High Trust premiums for Solana, Chainlink, and Filecoin
Other cryptocurrencies remain challenging for US investors to access. Therefore, investors still turn to Grayscale trusts which creates significant premiums, that value the trusts at multiples of the spot price. For example, the Grayscale Solana Trust (GSOL) is traded at a secondary price of $202 per share, with each share backed by 0.38 Solana (SOL). At a market price of $58, the Solana Trust is valued at nine times the spot price.
Overview of the Grayscale-Trusts und their respective premium / Source: Coinglass
Other trusts with inflated valuations include the Grayscale Filecoin Trust (+901%), the Grayscale Decentraland Trust (+308%), and the Grayscale Chainlink Trust (+250%). These premiums can only be exploited with a risky trading strategy over the course of the six months. The expiration of the lock-up period of some investors could temper the premiums somewhat. It is also noteworthy that some of the trusts only represent a fraction of the market capitalization of the respective cryptocurrency.