Grayscale Bitcoin premium rebounds as BTC price falls below $35K — What does it mean?

Bitcoin (BTC) has crashed by around 44% from its all-time high of $64,899, signaling an end to its second-largest bull run that started in March 2020. Many analysts, including those from BiotechValley Insights, see “terrible technicals” in the Bitcoin market, noting that the flagship cryptocurrency could extend its ongoing decline until $20,000.

Nevertheless, Glassnode Insights, a weekly newsletter issued by on-chain data analytics service Glassnode, anticipates a Bitcoin price recovery in the sessions ahead, based on an on-chain indicator that serves as a metric to gauge institutional interest in the cryptocurrency.

Enough with discounts

Dubbed as Grayscale Premium, the metric tracks the capital flows into the Grayscale Bitcoin Trust (GBTC) — the largest investment vehicle for institutional investors looking to gain exposure in the Bitcoin market.

A rising Grayscale Premium shows a higher bitcoin inflow into Grayscale Bitcoin Trust. That prompts GBTC to trade at a premium with respect to the BTC spot price. Conversely, a lowering Grayscale Premium conveys a declining BTC inflow, prompting GBTC to trade at a discount to Bitcoin spot pricing.

The Grayscale Bitcoin Trust attracted more than 50,000 BTC to its reserves throughout January 2021 and the first half of February 2021. GBTC traded at a 10-20% premium in the said period, showing a rising institutional interest.

Grayscale BTC holdings so far in 2021. Source: Glassnode

Nevertheless, the premium fell below 10% in the first half of February. GBTC started trading at discounts to spot pricing. The same period saw the BTC/USD spot rate climbing from lower $30,000s to almost $65,000 in April. By then, GBTC premium had flipped below zero.

On May 13, just ahead of the Elon Musk-led Bitcoin market crash on May 19, the GBTC premium reached a peak low of 21.23%. It showed that institutional demand for bitcoin investment products had softened since late February.

But the May 19 price crash improved the Grayscale Premium, noted Glassnode Insights. The metric recovered to -3.8%, suggesting that institutional interest, “or at the very arbitrage trader conviction,” rose in tandem with declining Bitcoin spot prices. 

Grayscale Premium recovering after GBTC at a discount 3 months in a row. Source: Glassnode

The Canadian Purpose Bitcoin ETF underwent a similar discounting trajectory, witnessing consistent capital inflows through late April and early May and outflows later in a sign of weakening institutional demand. Glassnode noted:

“However, similar to GBTC, demand flows appear to be recovering meaningfully in following the price correction with inflows back on the rise as of late-May.”

Buying the Bitcoin price dip?

The contrast between lower Bitcoin spot rates and recovering GBTC prices conveyed that institutions have not outright abandoned the crypto market. Instead, it shows that the sell-off has motivated investors to gain exposure in both Grayscale Bitcoin Trust and Canadian Purpose Bitcoin ETF. Glassnode wrote:

“Institutional products GBTC and the Purpose ETF are showing signs of recovery despite collapsing prices providing early signs of renewed institutional interest.”

The analytics portal also referred to metrics that showed that the majority of sellers in the latest BTC price run-down appeared to be short-term holders. Meanwhile, long-term holders bought the price dip “with conviction.”

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