Are major players like Grayscale and MicroStrategy moving the price of bitcoin?
In my previous coverage of MicroStrategy’s mega-leveraged all-in bitcoin bet, the main contention was that the firm’s outsized bitcoin bet risks significantly impacting the market if it fails to get MicroStrategy’s margin called. Such a large concentration of bitcoin owned by a single entity leaves the market vulnerable to its whims.
This concentrated distribution of bitcoin wealth among bitcoin holders was probably not something Satoshi Nakomoto envisioned. But how did we get from bitcoin being a new form of electronic money to being a form of digital gold?
Bitcoin was created by Satoshi Nakamoto as an autonomous means of transferring money. In fact, Satoshi defined bitcoin as “a pure peer-to-peer version of electronic cash.”
His white paper is about creating a money system that can be used independent of intermediaries.
However, bitcoin’s use case as a payment method and cash transfer is minimal compared to its massive use simply and purely as a speculative bet.
In a study by the ECB published in 2014, a very strong correlation was found between bitcoin’s popularity and price growth. Surprisingly, the study also revealed that bitcoin grew alongside the shadow economy, but it also concluded that the currency is more popular as a payment method in countries with a lower GDP per capita.
And according to statistics, as of 2021, the use of crypto is much higher in developing countries than in rich economies. Nigeria tops the list, with 42% of respondents having used cryptocurrency, while in the US the figure is just 13%.
There is also evidence to suggest that bitcoin’s price may not be rising due to mass and organic adoption, but rather by institutional players pushing the price up by speculative games.
Enter MicroStrategy and Tesla
In September 2020, MicroStrategy made its first bitcoin purchase, immediately becoming the largest known company owner. The company purchased 70,469 coins for a total purchase price of approximately $1.125 billion (approximately $15,964 per bitcoin), including fees and expenses. It’s a big buy and an interesting price: within touching distance of bitcoin’s 2017 high before plunging below $4,000 the following year. A few months after MicroStrategy’s big purchase, bitcoin’s price began to skyrocket.
MicroStrategy continued to buy bitcoin, but was soon joined by a new player: Tesla. In 2021, the SEC filing said it bought total 1.5 billion dollars in bitcoin that year and intended to accept the crypto as a form of payment.
Elon Musk pumped the news on Twitter and bitcoin jumped from $38,000 to $46,000 in just 24 hours. In the second quarter of the year, Tesla sold 75% of its bags.
Read more: Explained: MicroStrategy’s margin call math
There is also another calculation to consider. According to crypto analytics firm Glassnode, up to 50% of unique bitcoin wallets were in surplus by the end of June this year. The number of unique wallets peaked in April 2021 with more than 1.2 million but as of July this year, the number was below 900,000. We cannot confirm whether these unique wallets are all owned by unique individuals, but an article by Igor Makarov, associate professor from the London School of Economics, contains some very interesting facts.
By 2020, at least 5.5 million bitcoins, a third of all available supply, were held by intermediaries defined as exchanges or financial institutions that hold bitcoin in another party’s name. This would probably be a shocking number to Satoshi considering that he invented bitcoin for the specific purpose of cutting out intermediaries.
It seems rich people are hoarding bitcoin
At the end of 2020, individual investors owned 8.5 million bitcoins. The top 1000 owners own 3 million bitcoin, while top 10,000 investors own 5 million bitcoin. Most importantly, Glassnode’s study found that only 10% of all bitcoin transactions had any actual financial purpose in terms of commerce.
Among the middlemen we also find a large concentration of wealth in a few hands. The largest intermediary, which is considered to have the largest amount of bitcoin, is Grayscale with its Grayscale Bitcoin Trust (GBTC).
GBTC launched in September 2013 with less than $3 million in assets under management, but today its parent company Grayscale is a leading crypto intermediary with total $14.4 billion in bitcoin and up to 700,000 investors with a minimum investment of $50,000.
It also has several crypto funds, including an Ethereum trust with $4.69 billion in assets, $714 million in various altcoin funds, and a $4 million DEFI trust. Grayscale has also proposed turning its bitcoin trust into an ETF, but this has been repeatedly denied by the SEC.
Read more: Grayscale lawsuit against SEC escalates GBTC hostage crisis
But why would you hold bitcoin in a trust if the whole point of bitcoin was to be a “pure peer-to-peer money“? If you own shares in GBTC, you can’t even redeem your bitcoin, so it’s reasonable to assume that GBTC’s customers are wealthy entities who are betting on bitcoin’s price going up, but would rather have someone else hold it for them.
These include ARK Investments Management LLC, which is the largest client with 0.84% of all GBTC and more than six million shares, followed by Horizon Kinetics Asset Management which owns 0.34% of GTBC shares. JPM Morgan’s institutional fund held a lot of GBTC last year, even exceeding ARK’s holdings at one point by 13 million in total.
However, since late last year, JP Morgan’s fund appears to have significantly liquidated its GBTC positions with one offloading most of its 3,642,118 shares.
Bitcoin goes cheap through GBTC
But America’s biggest bank isn’t the only one selling GBTC. Gray tones have sold at a discount on NAV since the end of February this year. This basically means that there is a surplus of outstanding shares compared to demand. At the time of writing, GBTC’s discount to NAV is a full 30%, which means that you can buy bitcoin 30% cheaper through a GBTC share.
This discrepancy may be due to the fact that GBTC is not an ETF and therefore shares outstanding are not equal to demand outstanding. However, GBTC may also be in some trouble of its own.
According to a recent analysis by DataFinnovation, Digital Currency Group (DCG), GBTC’s parent company, appears to have purchased GBTC shares. DCG apparently bought up to 18 million shares of GBTC from March 2021 to March 2022. This purchase coincided with now-bankrupt crypto hedge fund Three Arrows Capital (3AC) selling 15 million of its GBTC shares.
At the same time, bitcoin’s price increased and GBTC sold at a premium. Genesis, which is also owned by DCG, lent bitcoin to people to create GBTC. This seems strange, given that the bitcoin holder would lose the prize which GBTC’s NAV traded at when bitcoin’s price was sky high.
Genesis stopped borrowing bitcoin to create GBTC shares when NAV was trading at a discount. Strangely enough, 3AC gave the bitcoin – which was borrowed by Genesis – back to Genesis to be converted into GBTC shares. Then 3AC used these as collateral to take USD loans from Genesis.
Read more: BlockFi breaks ties with GBTC, its most profitable asset ever
At face value, it appears that 3AC was given the funds by DCG to leverage GBTC’s premium in the hope that it would continue to go higher: a circular self-consuming bet. With 3AC now in the process of winding down, it remains to be seen what the full ramifications for GBTC will be.
So, is bitcoin about to become a rich man’s casino? Comparing price action with moves by major players seems to confirm this. And that may also explain why bitcoin is so volatile. Big players and big moves can significantly change the bitcoin market or rather worsen the trend. Having a bear market that can flush out over-leveraged financiers from the market may be in line with Satoshi’s principles, but it may not be good for the price.
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