Detailed explanation of Grayscale Digital Asset Trust: Operational Model and Premium Situation Overview

Original author: Matias Andrade Cabieses Original compilation: Deep Tide TechFlow

A major development in the digital asset investing space is the upcoming launch of spot exchange-traded funds (ETFs). The arrival of spot ETFs could greatly simplify investing in digital assets and expand the range of investment products, especially for U.S. investors. Currently, investment options are largely futures-based. These instruments have fixed maturities and established term structures that may impose unexpected costs on investors. Alternatively, investments can be managed through trusts, like Grayscale's offering.

In this article, we take a deep dive into how Grayscale's Digital Asset Trust works and compare it to a potential spot ETF.

Trust products that do not require trust assets

In the digital asset space, investor demand for exchange-traded products has grown steadily for a variety of reasons. A key reason for this is the difference between tax-advantaged accounts and asset self-custody. The process of self-hosting, while allowing complete control over assets, involves significant complexity and requires extensive technical knowledge to ensure a safe and successful implementation. In addition, investments made in this manner will face considerable tax obligations, proportional to capital gains tax and income tax.

Currently, the major tax-advantaged accounts available to most investors in the United States, including Individual Retirement Accounts (IRAs), 401(k) plans, and Health Savings Accounts (HSAs), do not allow direct investment in digital assets, although there are some notable exceptions, Including Fidelity, listed miners and Microstrategy. This limitation hinders the ability to defer or offset taxes associated with investing in digital assets, which is a considerable disadvantage for investors. Even for investors who choose self-custody, these accounts are still very important because even a slight reduction in capital gains tax payments can significantly affect the overall performance of the investment (especially when short-term capital gains tax rates apply, as shown below) .

(Shenchao Note: The blue line is the short-term after-tax rate of return, the gray line is the long-term after-tax rate of return, and the yellow line is the net rate of return of BTC itself)

We can take this a step further and self-hosting is simply not a viable option for most people, whether due to lack of technical knowledge or because regulatory or legal restrictions interfere with such ownership, especially for corporate entities. Given these hurdles, exchange products are not only a convenient alternative, but an essential part of the digital asset investing landscape. They serve a similar role in other asset classes where self-custody may be possible but not practical, like precious metals.

However, it is important to understand that not all exchanges trade the same products. Each product has unique characteristics that may have a different impact on an investor's portfolio. In this case, we turn our attention to the Grayscale product line. Our goal is to dig into the specific features of their products to better understand their nuances. By doing so, we can gain a clearer picture of why the potential introduction of spot ETFs is causing such a stir in the market.

Grayscale Trust Products

Grayscale offers a range of investment products that can give investors exposure to individual digital assets (such as BTC, ETH, etc.) or various indices that track multiple asset portfolios. All of Grayscale's products have one thing in common, they are all structured as trusts, meaning the value of the shares can float with the value of the underlying asset portfolio. Throughout its history, Grayscale's Bitcoin Trust (GBTC) saw the stake value exceed the value of the underlying Bitcoin during the peak of the 2020-2021 bull market. And at other times, shares may trade for less than the value of the underlying Bitcoin, even as low as 50% of its value. These changes are often referred to as premiums and discounts.

The value dynamics of these trust products are important for two main reasons. First, as an investor, you can buy shares at current market prices. This means that you may receive Bitcoin investment opportunities at a discount or premium, depending on prevailing market conditions, which may change your investment risk profile, especially compared to spot investments with no annual management fee. The second reason to note is that savvy investors can profit from mispriced assets through arbitrage trading strategies. Therefore, when GBTC trades Bitcoin at a premium, it is possible to trade risk-free by buying Bitcoin while selling or shorting GBTC in the spot or futures market. Investors can profit from the price convergence of these two positions, achieving theoretical risk minimization.

(Shenchao Note: An overview of the changes in the net asset value (NAV) of different digital asset trusts in Grayscale, and the vertical axis represents the premium/discount ratio)

If we look at the chart above, we can see that the various trusts set up for different assets developed very differently. While ETH's discount rate is around 50%, BTC, BCH, LTC, and ETC are trending closer to parity, while LINK actually exceeds parity, trading at a 270% premium. This trend may be due to investors realizing that with the recent news that BlackRock has applied to create a spot bitcoin ETF, if Grayscale also gets approval to convert these funds into an ETF, the price will match parity. While we might think this sounds far-fetched (since it means people are paying nearly three times the spot price), it is common for investment vehicles that are particularly illiquid, especially when speculative When capital flows dominate. We can see the same behavior below for other trusts provided by Grayscale.

Filecoin (FIL) and Stellar (XLM) trade at 8x and 4x spot prices, respectively. These price dislocations are significant, suggesting that these funds are very illiquid, and with limited access to these assets within the U.S., arbitrageurs can easily squeeze premiums and profit. However, it also shows that some people are willing to acquire these assets at a huge premium, which is an interesting observation.

in conclusion

In short, the evolution of the digital asset investment landscape, especially the expected launch of spot ETFs, is expected to bring about revolutionary changes. Currently, options such as futures and investment trusts offered by Grayscale present a unique set of challenges. However, the introduction of spot ETFs may simplify these complexities, providing investors with a more efficient and direct way to acquire digital assets. As we continue to explore this fascinating digital investment space, the ability of investors to adapt and innovate, as well as the advancement of regulation, will undoubtedly play a key role in shaping the future of digital asset investment.