Grayscale ETHE has a 900% premium, but it is difficult to arbitrage. Under the 114 rules of the Securities Law, the 12-month lockup is the root cause

特邀专栏作者

2020-08-12 17:55 (UTC+8)

This article is about 2990 words, reading the full article takes about 5 minutes

The highest premium of Grayscale ETHE Trust exceeds 900%, and the current premium is still maintained at 300%, while the GBTC premium has been maintained at around 18% for a long time. On the one hand, there is arbitrage demand, and on the other hand, FO

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So, what is the root cause of the current high premium of ETHE? How does all this relate to the limitations of Rule 144 of the U.S. Securities Act of 1933?

1. Grayscale encryption trust purchase form: cash contribution and physical contribution

Cash contribution means that investors deliver their own cash (US dollars) to Genesis Global Trading, an affiliated company of Grayscale. After Genesis gets the investor's cash, it converts the cash into BTC or other cryptocurrencies required by customers according to the market price. These cryptocurrencies are then delivered to Grayscale to create GBTC, ETHE or other trust shares. This is a cash contribution process that must have Genesis as an intermediary.

Look at cash contributions first.

Then look at the real investment.

In-kind contribution means that qualified investors directly deliver physical cryptocurrency to Grayscale, and then directly exchange for GBTC, ETHE or other cryptocurrency trust shares.

So, what is the specific situation of these two investment methods?

According to the data previously disclosed by Grayscale, in the third quarter of 2018, the amount of capital contribution in kind accounted for 58% of the total quarterly capital contribution, 71% in the second quarter of 19, and 79% in the third quarter of 19. According to the historical data from 2018 to 2019, the proportion of investors’ in-kind contributions is relatively large, and there is an obvious increasing trend, that is, most of the funds received by Grayscale Trust are in the form of physical objects, rather than directly purchased in the secondary market.

According to the above data, we assume that in the first half of 2020, the proportion of cash investment and in-kind investment of Grayscale Encryption Trust is 20% and 80% respectively. Buy directly in the secondary market, and all the rest are directly invested by investors with cryptocurrencies such as BTC and ETH.

Therefore, the skepticism of domestic investors is justified.

So, why does Grayscale Trust need to lock positions for 6 months and 12 months, and who stipulates these times? Why GBTC and ETHE prohibit redemption? These "culprits" that lead to the high premium of ETHE come from the specific provisions of US securities laws and regulations.

2. Under supervision, GBTC is locked for 6 months, and ETHE is locked for 12 months

Let me first introduce the law of the United States Securities Act of 1933.

The US Securities Act of 1933, the US Securities Exchange Act of 1934 and their supporting regulations and regulations constitute the basic framework of US securities regulation. The U.S. Securities Act of 1933, as the current U.S. securities law, mainly regulates the procedures for securities issuance and review (primary market), and has a huge influence in the field of securities laws in the U.S. and around the world. Especially in recent years, the law has undergone several important revisions.

These main laws are used by the SEC to deal with Ruixing Coffee’s financial fraud.

Among them, Rule 144 of the "U.S. Securities Act of 1933" stipulates that after securities are issued, they need to have a lock-up period of 6 months or 1 year. After that, they can only be publicly traded in the secondary market with the consent of the beneficiary.

On January 21, 2020, Grayscale Investment Bitcoin Trust (GBTC) registered as a reporting company with the U.S. Securities and Exchange Commission (SEC). The lock-up period of its GBTC securities was shortened from 1 year to 6 months, and the official implementation time is 2020 On April 21st, the ETHE lockup period is still 1 year. It is precisely because of this that the GBTC premium is far lower than ETHE.

After the 6-month lock-up period, GBTC investors can only sell GBTC to other investors in the secondary market, instead of buying and selling the Bitcoin represented by GBTC.

This is thanks to "Regulation M" (which acts to "regulate market activities during public offerings" and is designed to prevent potential manipulation by underwriters, issuers, holders of selling securities, and other securities offering participants. ), any GBTC and ETHE holders cannot redeem the physical BTC and physical ETH represented by GBTC and ETHE.

Regardless of whether investors contribute in cash or in kind, once they exchange their dollars or bitcoins for BTC, at least for now, they will never get it back. This is actually participating in Staking in disguise. Staking without paying management fees!

This is not the case in history. GBTC once had a redemption plan. Before October 28, 2014, Grayscale Trust investors could redeem through Genesis. But the redemption program was later found to have violated Rules 101 and 102 under Regulation M, and the program was terminated.

To sum up, whether it is GBTC or ETHE, they must be issued and circulated under the constraints of US securities laws and regulations. The advantage of this is that the entire securities market can operate in a standardized manner, and information can be made transparent and supervised The strict supervision of the sector is a good protection for investors.

However, these regulations have caused some negative effects, such as high premiums caused by insufficient liquidity.

3. With high fees and ultra-low circulation, arbitrage becomes a high-risk action

900% premium! This means that what you buy for $1 can sell for $10. If the premium is 10 times, even if the leverage is doubled, a successful operation will yield nearly 100 times the return. This kind of arbitrage is a huge temptation for any investor.

But all of this is premised.

First of all, "arbitrage" refers to borrowing when ETHE is at a high premium, and then buying it back after the price of ETHE drops to the normal price, repaying the principal and interest. Muddy water shorting Ruixing and institutions shorting LINK are the same routine.

This is reasonable and beneficial to the market, because arbitrageurs can smooth out the high premiums of all securities, including of course the 900% premium rate of ETHE.

But this is premise-the stock (ETHE and GBTC) in the market must have sufficient circulation. If there is little or almost no circulation, it will cause the borrowing cost (interest) of arbitrageurs to rise sharply.

Under Rule 144 of the U.S. Securities Act of 1933, a large amount of ETHE in the market is in a one-year lock-up period. At present, there are very few ETHEs that have been released from circulation, which makes it almost impossible for ETHE in the secondary market to be shorted.

By observing the issuance history of ETHE, we can see that the shares due in June and July this year are insignificant compared to the shares issued in the past year—only about 3% of the total issuance.

As of June 30, 2019, the total number of circulating shares of ETHE was 455,435 shares, which means that the shares that can be freely traded now only account for about 3% of the current total number of shares (15,498,400 shares).

Even so, the release of ETHE in June and July 2019 also led to a sharp drop in the price of ETHE. According to the latest data from Yahoo Finance, the price of ETHE has dropped from a peak of $239.5 on June 4 to $70.2 on July 21, a drop of up to 70%.

Very little circulation leads to high borrowing costs, which is extremely unfavorable for arbitrageurs or short sellers. The total cost of a short seller is divided into borrowing costs and management expenses. Taking shorting GBTC as an example, the current GBTC borrowing cost is 15%, plus other expenses such as handling fees. The 18% premium of GBTC is not enough to cover expenses, and it is even more difficult to make profits up.

And since the circulation of ETHE only accounts for about 3%, there is no borrowing share for shorting at all.

In addition, investors can also borrow physical BTC and ETH to exchange shares at Grayscale, but it will take 6 months (GBTC) or 12 months (ETHE) before the ban on circulation can be lifted, and the financial market is unpredictable , who can predict the story half a year later?

In short, even if the grayscale ETHE used to have a premium of as high as 900%, even now it has a premium of more than 340%, but because the current market circulation is too small, there are not only short-selling conditions at all. And those investors who meet the requirements (Greyscale has strict review of the qualifications of investors participating in GBTC and ETHE), exchange stocks by borrowing physical BTC and ETH, and must also take risks of 6 months and 12 months. And bear high borrowing costs-high premiums are difficult to arbitrage.

We know that Grayscale currently manages $4 billion worth of encrypted trusts. Even with a minimum annual management fee of 2% (GBTC has the lowest annual management fee of 2%), the gross profit is as high as $80 million, equivalent to 8695 bitcoins. (Based on $9,200).

This is a piece of fat, and Wall Street institutions have long been eyeing it, so in the face of competition, what should Grayscale do next? In extreme cases, whether the once high positive premium of ETHE will become a negative premium, we will have the opportunity to discuss these issues in the future.

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