Following the logic of the master, how does Arthur Hayes view the opportunity of GBTC discount?

BitMex co-founder Arthur Hayes published a lengthy article on his blog "White Man", discussing the financial drama involving DCG's companies Genesis and Grayscale, and 3AC of Three Arrows Capital. The financial protagonist in this drama is the Bitcoin trust fund GBTC, which has transitioned from significant premiums to substantial discounts. What opportunities does Arthur see in this?

Recap: Arthur Hayes discusses the rise of the DCG empire, understanding financial manipulation through one image

Background Overview

Grayscale is a cryptocurrency trust fund company under DCG, founded in 2013. Through its trust funds, it allows qualified U.S. investors to invest in cryptocurrency products through traditional financial markets in a regulated environment. Notable investors such as Ark Investment and Three Arrows Capital invest in Bitcoin through its flagship product, the Grayscale Bitcoin Trust (GBTC).

In the early days, there were few ways to purchase Bitcoin through traditional financial channels, which attracted many institutional investors to GBTC. It has consistently traded at a premium to the Bitcoin spot price. However, since February 2021, it has started trading at a discount, meaning the GBTC price is lower than the Bitcoin spot price it tracks. Despite DCG's attempts to purchase GBTC on the open market to prevent further discount widening, they have been unsuccessful. The bankruptcy of its largest investor, 3AC, and the overall bearish market conditions have contributed to the widening discount of GBTC, currently at -42.10% according to the latest data from YCharts.

Trading Parameters

Arthur Hayes speculated on the financial operations of the DCG group and its partners in the latter part of the article. He also analyzed whether there are arbitrage or other trading opportunities in the significant premium of GBTC. Let's first analyze some of the trading parameters:

• USD borrowing cost: Set at 5% based on the 2-year U.S. Treasury bond yield.
• GBTC holding cost: Annual management fee of 2%.
• Hedging cost: Establish a short BTC/USD perpetual swap contract in the market to sell BTC/buy USD in the future, using XBTM23 with a cost of 0.55%.
• GBTC discount: Calculated as 40% according to the article.

Arbitrage Trading

If we have no particular opinion on the price of Bitcoin, arbitrage is the safest way:

1. Purchase GBTC with USD.
2. Establish a short BTC/USD perpetual swap or futures contract for hedging.
3. Wait for the GBTC discount to disappear and turn to parity.
4. Sell GBTC while closing the contract in the opposite direction.

If it takes two years for GBTC to return to parity, our profit would be:

40% - 2 * 5% + 2% + 0.55% = 24.9%

It is worth noting that hedging contracts or futures trades are usually short-term. Long-term futures have poor liquidity, so they are not considered. The article uses a six-month quote as a reference, and rollover or repositioning would be necessary, causing cost fluctuations.

Bullish Bitcoin Trading Strategy

If you believe that Bitcoin is at its bottom now and expect the price to rise in six months, leading to GBTC moving from a discount to a premium along with the spot price, as predicted by Arthur based on historical data, you can directly buy GBTC.

Arthur assumes Bitcoin will rapidly rise from $16,000 to $30,000, and GBTC will shift from a 40% discount to a slight premium of 27%. The profit in six months would be:

67% - 0.5 * 5% + 2% + 0.55% = 63.225%

Ready to Trade?

After explaining all this, are you ready to trade? Wait a minute! Arthur also seriously reminds everyone to consider the risks and opportunity costs before trading. In today's uncertain market, locking scarce USD capital in trades with uncertain time frames is risky. If the crypto winter arrives, all asset liquidity will worsen, including GBTC. As an experienced trader, Arthur honestly advises to avoid these trades now and embrace the highly liquid U.S. bond market.

Don't forget! In November, Arthur tweeted that he bought Bitcoin put options expiring in March 2023 with a strike price of $15,000, anticipating the Bitcoin price to be below $15,000 by March next year.