In a newsletter sent out to clients, US bank JPMorgan has predicted that Bitcoin could fall to US$25,000. The situation could be brought on by the expiry of 16,000 GBTC held in a six-month lock-up period by the world’s largest cryptocurrency fund.
How Can the Grayscale Fund Impact the Price of Bitcoin?
On 18 July, the lock-up period for a total of 16,000 Bitcoin (BTC) is set to expire. This could encourage investors who entered six months ago at a lower Bitcoin price and are now sitting on some potential profits to sell their BTC instead of continuing to hold it.
Some analysts, including strategists at JPMorgan, believe that accredited investors will sell at least a portion of their GBTC holdings after the unlocking period, thus weighing further on the ongoing Bitcoin market downtrend. A selloff of 16,000 BTC, worth roughly US$540 million, could create even more pressure on the downside.
While weak flows and price momentum resulting from last month’s selloff have fuelled Bitcoin’s recent declines, potential sales of shares in the Grayscale Bitcoin Trust following the expiration of a six-month lock-up period could be an additional headwind.Nikolaos Panigirtzoglou, a Managing Director at JP Morgan
According to JPMorgan, the trust saw record inflows of US$2 billion in December 2020, followed by $1.7 billion in January. Globally, trust funds have billions locked up in Bitcoin.
How Does It Work?
In arbitrage trade, institutional investors (like hedge funds) borrow Bitcoin to purchase GBTC shares. Then, after the lock-up expires, these investors sell GBTC shares to secondary markets (retail investors), typically for a premium. Then they return the borrowed Bitcoin to their lenders and pocket the difference.
Each share represents 0.00094716 BTC, with the share tracking Bitcoin’s market price. It has a minimum holding period of six months and a minimum investment requirement of $50,000.
Rising GBTC premium shows a higher inflow of Bitcoin into the trust, while a decreasing premium indicates a declining BTC inflow and a transition into discounted premiums. If premiums are discounted, the seller would take a financial loss because the above-mentioned difference is gone.
GBTC shares traded at a premium of 40 percent or more to the spot Bitcoin price (current price in the market). So for the big investors it looked like a sure-fire way to profit, especially with such bullish market sentiment. There was little fear of the premium falling sharply.
However, in the second quarter the Bitcoin market has been in a backslide, and in February the GBTC premium flipped to a discount, leaving little motivation for new investors to attempt the once-popular trade. As of early July, GBTC shares traded at a discount of 10.5 percent, according to data provided by Skew.
Others Have a More Positive Narrative
Some think it is premature to consider the potential consequences of this event. Nevertheless, other analysts believe it will flush sellers from the market in July, possibly creating bullish potential.
In contrast with what JPMorgan is saying, some digital-asset analysts and investors claim it’s possible some of these investors might need to enter the market to buy Bitcoin again to repay cryptocurrency loans they used to finance their original purchases of the GBTC shares. The negative impact of the GBTC selloff may be balanced by the repurchases of Bitcoin in the spot market.
Additionally, those who deposit their Bitcoin holdings need to buy back coins to return to their base portfolio.
Since the beginning of the year, analysts have been forecasting a Bitcoin price of $146,000 in the long run. This may also cause some investors to hold.
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