The GBTC premium is the percentage above the spot price of bitcoin that the Grayscale Bitcoin Investment Trust (GBTC) trades at. The GBTC premium can be used as a gauge of sentiment in the market, helping to identify tops/bottoms in market cycles.
GBTC is a trust structure that is designed to allow traditional investors get exposure to bitcoin, where individuals can buy BTC through their retirement and stock trading accounts.
It is the first digital currency investment vehicle to gain the status of a reporting company by the SEC. In many ways, GBTC resembles a traditional asset; you can only trade it on weekdays and it is available only to certain investors.
The GBTC instrument carries a premium over buying bitcoin outright because of the many risks associated with cryptocurrency, mainly custody. Because investors do not have to worry about storage of BTC when buying GBTC shares, it is a more convenient way to get exposure to bitcoin's price fluctuations.
Historically, when one share of GBTC has displayed a high premium over the equivalent amount of spot bitcoin, it has usually signalled a top in the market. Large changes in the premium can also signal major turning points.
Calculating the GBTC premium
As stated on the GBTC website, 1 share in the trust is equivalent to 0.00096312 BTC.
The GBTC premium (%) can then be calculated by using the following formula:
=((implied GBTC BTC-USD rate - Bitcoin price)/Bitcoin price)*100
Where is the implied GBTC BTC-USD rate is:
= price of GBTC*(1/0.00096312)
= price of GBTC*1,038.29221696
The GBTC Premium and the Price of Bitcoin
We've calculated the formula above using the closing prices of the Bitcoin Liquid Index as the price of bitcoin and the closing prices of one GBTC share from the first day it was traded. The data is from TradingView.
The premium is displayed below along with the price of bitcoin:
Historically, lows in the GBTC premium have usually occurred at the same time as local bottoms in the price of bitcoin. Similarly, extremely high values of the premium have often corresponded with local tops in the price of bitcoin.
However, it's worth keeping in mind that the premium was very high in the first couple of years that the GBTC instrument was traded. Since late 2018, the premium has fluctuated between 45% and near 0%.
The chart below shows how changes in the GBTC premium correlate with price movements. The 10-day change in the GBTC premium (which is equivalent to two weeks) is compared with the price action of BTC-USD since 2017:
The chart shows that extremely large positive changes in the GBTC premium are associated with major turning points in the market. For example, we see large spikes around the all-time high in late 2017. Similarly, we see a large spike in early 2019 as bitcoin bottomed out around $3,100.
The distribution of the GBTC premium since the instrument started trading is displayed below:
The histogram shows that most of the time, the premium has clustered around 19-24%. Another smaller cluster is shown around 63-68%.This information could be useful when assessing whether the premium is relatively low or relatively high. For instance, the histogram shows that the premium has only been under 20% very few times (or above 90% very few times).
You could also calculate the histogram using the past year's worth of data to identify extreme levels in the GBTC premium.
Where Can I Track the GBTC Premium?
You can find the GBTC premium as a time series on TradingView as a custom indicator, on the analytics website Bybt or via YCharts. You can also view the current value of the premium on Clark Moody's Bitcoin dashboard.
As more products have been introduced, such as the CME's bitcoin futures, Bakkt's physically settled futures, and other instruments, the GBTC premium may become less reliable at gauging sentiment in the market. As a product that is available for investors to buy and sell in the same way as virtually any U.S. security, it provides convenience for traditional investors and therefore carries a premium over buying bitcoin in spot markets.
The GBTC premium itself and changes in this premium can often highlight important turning points in the market. When there are large changes in the GBTC premium, this often identifies major turning points in the market (although it may not identify every turning point). Also, relatively low/high values are often associated with bottoms/tops in the market.