Canadian BTC ETFs Bring Significant BTC Inflows - CrossTower
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March 17, 2021
Cryptocurrency Research Martin Gaspar, Research Analyst
martin.gaspar@crosstower.com
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Canadian BTC ETFs Bring Significant BTC Inflows
BTCC Acquires More BTC Than Grayscale in February
We expect Bitcoin ETFs to replace GBTC as major driver of BTC price.
Last month brought the previously unthinkable – a sustained GBTC discount, with GBTC
trading below NAV for 13 out of 15 trading days since closing at a discount on February
23, 2021, according to data from Glassnode. As the GBTC premium waned in January from
its historical range of 10-40%, flows into GBTC thinned in February. Grayscale purchased
approximately $349 million of BTC in February, down from roughly $1.5 billion in January.
In our view, the lower inflows may have been a catalyst for BTC price weakness in the back
half of February. We believe investors should be concerned about lower Grayscale flows
into BTC, as the flows were crucial market support, especially over the last year. Offsetting
these flows, however, are three Canadian BTC ETFs which were recently approved and
launched. Purpose Bitcoin ETF (BTCC) has seen the most inflows thus far, acquiring
approximately $730 million of BTC through March 15, 2021, nearly a month since
launching. In our view, BTCC’s early success suggests pent-up retail and institutional
demand for such a product and should continue to attract investor interest. As institutional
investors shun GBTC, we expect ETFs like BTCC to be a key barometer of investor demand
and support for relatively high BTC prices.
Highlights
▪ Grayscale premium evaporates. After briefly turning negative several times in Contents Page
January, the GBTC premium remained in the low single digits throughout much of
Highlights ............................. 1
February, before closing at a discount at the end of the month. The Grayscale trade
has long been a favorite of institutional investors and with the premium at risk, we GBTC ................................... 2
anticipate demand for GBTC at private placement to be pressured, leading to a lack of
Canadian BTC ETFs ........... 3
what has historically been strong inflows for BTC. In fact, Grayscale has since closed
the private placement. Corporate Buying ............... 4
▪ Purpose Bitcoin ETF (BTCC) sees strong demand. From its launch on February 18, Institutional Interest ............ 5
2021, BTCC has dominated the Canadian Bitcoin ETF space and has seen robust
Disclosures .......................... 6
demand, adding over $0.5 billion of BTC in just a week since its debut. The Evolve
Bitcoin ETF (EBIT), another Canadian Bitcoin ETF that launched in February, held
approximately $51 million of BTC as of March 15, 2021.
▪ ETFs likely to replace Grayscale as key driver of crypto market. For much of 2020,
Grayscale inflows were key in Bitcoin’s price appreciation, but will likely dwindle with
the premium at risk. We expect ETFs to fill the inflow gap as awareness grows and as
investors prefer the liquidity of an ETF to trusts such as those offered by Grayscale.
▪ Corporate and institutional appetite for crypto remains high. Bitcoin bellwethers
MicroStrategy and Square continued to purchase BTC in February, while more
financial companies, such as Goldman Sachs and JPMorgan announced plans to offer
crypto-related products.Grayscale Inflows Taper Off as GBTC Premium Turns Into Discount
The Grayscale Bitcoin Trust (GBTC) saw inflows slow down significantly in February as the
premium (OTC price vs. NAV) thinned and traded negative. Since closing at a slight
discount on February 23, 2021, GBTC has traded at a discount to NAV for 13 of the Grayscale purchases of BTC
following 15 trading days, according to data from Glassnode. The sustained discount was plunged in February 2021 as
just a matter of time, in our view, as awareness of the Grayscale trade increased among investors grew concerned
institutional investors. Consequently, shares of GBTC increased substantially over the last about the durability of the
GBTC premium.
year, leading to a glut of shares on the market. In fact, outstanding GBTC shares as of
February 23, 2021 totaled approximately 692 million, more than double the 304 million
shares from a year ago (February 27, 2020) and nearly 55% more than the approximately
445 million shares from 6 months ago (September 1, 2020). Since the lockup for GBTC
shares became 6 months in 2020, the 6-month growth in shares is particularly telling of
how crowded of a trade it has become. Since February 23, 2021, GBTC has mostly traded
at a discount, according to data from Glassnode, partly on outflows from the ARK ETF, a
large holder of GBTC.
We believe the recent discount is due to a couple factors, namely 1) A supply glut of
unrestricted shares and 2) Broad market weakness across risk assets that made investors
reconsider their positions at near all time-highs.
It seems that the weakness in the premium throughout 2021 indicates that the trade has
become more popular than the appetite for GBTC shares on the OTC market. We expect
this to continue unless a surge in BTC price or sentiment spurs higher demand for GBTC
shares. Consequently, we anticipate lower investor demand for the Grayscale trade, which
should lead to less BTC inflows from Grayscale. This was most evident in February 2021,
where the pace of inflows decreased significantly from recent months, with Grayscale
purchasing roughly $349 million of BTC, according to data from Glassnode. This is down
from approximately $1.5 billion in both January 2021 and December 2020. We believe this
is strong evidence that uncertainty about the Grayscale premium is leading to reduced
investor demand for the GBTC at the private placement. We note that Grayscale closed
GBTC to private placement following the discount in late February, which explains why
there were no March inflows to date.
This is a net negative for Bitcoin as Grayscale purchases of BTC were substantial drivers
of the BTC price in recent periods, in our view. With the GBTC premium gone and GBTC
private placement currently closed, other buying demand for BTC will need to step in to fill
the void from Grayscale, such as Canadian Bitcoin ETFs.
Digital Currency Group Steps in To Support GBTC
On March 10, 2021, Digital Currency Group (DCG), the parent company of Grayscale,
announced it would purchase of up to $250 million of GBTC shares on the open market.
We view this favorably, as these purchases could absorb some of the GBTC selling, but is
unlikely to be substantial enough to bring back GBTC closer to NAV or a premium. It is in
DCG’s best interests to step in and support GBTC on the open market, given that the
discount may be leading to losses at some of the firms its subsidiary Genesis lends to. A
discount is also unfavorable for DCG, given that Grayscale would not be increasing AUM
in terms of BTC. We are optimistic that this sort of intervention could help restore investor
confidence in the Grayscale trade, but note that it is more of a symbolic move, given
average daily volumes of GBTC of roughly $700 million in recent months. $250 million of
2purchases in this context seems unlikely to move the needle. We surmise DCG could choose to increase purchases of GBTC to make a market impact if the discount persists. Canadian BTC ETFs Set to Replace Grayscale for Key BTC Inflows One area that has seen significant interest are the Canadian Bitcoin ETFs, the first of which were approved and launched in February. Currently the Purpose Bitcoin ETF (BTCC), Evolve Bitcoin ETF (EBIT), and CI Galaxy Bitcoin ETF (BTCX) are the Bitcoin ETFs that have launched in Canada. Through March 15, 2021, BTCC saw approximately $730 million of inflows since launching, bringing its total BTC holdings to roughly 13,565 BTC, according to data from Glassnode. EBIT had approximately $51 million of BTC holdings as of March 15, 2021, or approximately 944 BTC, according to its website. BTCX began trading on March 9, 2021 and held nearly $20 million of BTC as of March 15, 2021, according to its website. Importantly, these three ETFs are required to hold physical BTC, so their inflows have helped support the price amid recent market weakness. Canadian Bitcoin ETF Timeline February 12 – Purpose Bitcoin ETF (BTCC) cleared to launch by Canadian securities regulators. February 16 – Evolve Bitcoin ETF (EBIT) cleared to launch. February 18 – BTCC starts trading. February 19 – EBIT starts trading. March 8 – CI Galaxy Bitcoin ETF (BTCX) final prospectus approved by securities Canadian regulators. March 9 – BTCX begins trading. We expect these instruments to replace Grayscale as key drivers of the BTC price going forward. While this trend may reverse in the future if GBTC returns to trading at a premium, we believe a return to a sustained GBTC premium in the future is less likely given the significant increase in supply of shares in recent months, barring continuous open market purchases of GBTC by DCG. We also believe demand for products that have lower management fees than GBTC’s 2%, such as these ETFs, will capture a portion of investor demand that had previously went to GBTC. Canadian ETFs Bring Unique Potential Risks We want to draw attention to a unique potential tax risk that investors face when investing in these Canadian Bitcoin ETFs – the determination of whether sales of BTC is recognized on the income account or capital account, as is mentioned in the Purpose Bitcoin ETF prospectus. The Canada Revenue Agency (CRA) has generally taken the position that sales of commodities, as opposed to securities, are recorded on the income account and therefore subject to Canadian income tax, rather than being treated as capital gains, 3
although the treatment in each case is based on factual enquiry. Bitcoin is categorized as a commodity in Canada for tax purposes, so it is our understanding that sales of BTC could be subject to Canadian income tax, rather than treated as capital gains. The Purpose fund generally intends to treat sales on the capital account (i.e. should give rise to capital gain or loss), given it aims to be a long-term holder of BTC. If the CRA views sales of BTC to actually be on the income account, the difference in the fund’s net income could be deemed to have been distributed to investors, who could then be subject to withholding tax. Given that the CRA is unlikely to pursue non-resident shareholders directly, it could pursue the fund for unpaid withholding taxes. If the fund is unable to recover the unpaid withholding taxes from non-residents whose shares are redeemed, the fund could need to sell holdings to make the payment, reducing its NAV. In its prospectus, the fund says it anticipates only selling BTC for 1) Fund expenses and 2) Redemptions. While the risk of a significant unpaid tax liability is relatively benign if there are negligible redemptions, we note that large amounts of redemptions could lead to an unfavorable scenario. However, there would likely need to be considerable selling pressure of the fund’s shares or a lack of buying demand to spur investors to redeem their shares rather than sell them on the market. Corporate Buying Continues In Recent Weeks In our previous report, we discussed our expectation of sustained institutional and corporate purchases of BTC to support the price over $50,000. In our view, this has materialized and has helped prop the BTC price despite recent market weakness. Specifically, Square and MicroStrategy continued to snap up BTC. Square announced in its Q4 2020 earnings press release on February 23, 2021, that it purchased an additional 3,318 BTC at an aggregate purchase price of $170 million (~$51,000/BTC). Combined with Square’s previous purchase of $50 million in BTC, it now held approximately 5% of its total cash, cash equivalents and marketable securities as of December 31, 2020 in BTC. MicroStrategy announced it purchased $15 million and $10 million of BTC on March 1 and March 5, 2021, continuing to add to its holdings shortly after its $1.05 billion debt financing to purchase BTC in late February. As of March 5, 2021, the company held approximately 91,064 bitcoins that were acquired at an aggregate purchase price of $2.196 billion. MicroStrategy is one of the largest known holders of BTC, according to data from the website Bitcoin Treasuries. Speaking at an industry event in late February. MicroStrategy CEO Michael Saylor indicated his firm was open to both equity and debt financings to purchase BTC. The company has issued convertible notes twice so far (February 2021 and December 2020) to fund BTC purchases but has yet to do an equity raise for the same purpose. Other notable institutional purchases of crypto included Meitu, a Chinese tech company, which announced on March 7, 2021, that it purchased approximately $40 million of BTC and ETH, allocating roughly $20 million to each. It said its cryptocurrency investment plan allows it to purchase up to $100 million of crypto, suggesting we could see it return to the market. 4
On March 8, 2021, Aker, a Norwegian industrial company whose chairman is billionaire Kjell Inge Rokke, announced it is launching Seetee, a unit that will focus on Bitcoin. It will keep its treasury reserves in BTC and said its first purchase was 1,170 BTC (~$60 million at recent prices). We believe these announcements are just the tip of the iceberg for greater BTC adoption from corporations. As yields continue to remain low, while inflation expectations rise on potential stimulus and the prospect of economies reopening with COVID-19 vaccines available, we anticipate more companies will consider BTC for their balance sheet. Recent Headlines Suggest Institutional Interest Continues to Grow Institutional interest in BTC remains strong, according to recent headlines, which included Goldman Sachs relaunching its crypto trading desk after a three-year pause. The news followed media reports in January that Goldman was exploring crypto custody. The move signals rising institutional interest in crypto, which Matthew McDermott, Goldman’s Head of Digital Assets, described as “huge” on a recent podcast. He also said that in a survey of nearly 300 clients by the firm, 40% currently have exposure to crypto. 22% of the survey’s participants expect BTC to trade above $100,000 within a year, an especially telling figure of institutional interest in crypto, in our view. Another development suggesting rising interest is PayPal’s acquisition of crypto custodian Curv, announced on March 8, 2021, which CNBC reported was for less than $200 million. The acquisition allows PayPal to further expand its services, and we could see PayPal roll out more retail and even institutional products. This goes hand-in-hand with PayPal’s recent plans for launching a dedicated crypto unit and its ambitions for expanding its crypto product suite beyond basic investing services (buy/sell). Retail demand is also high, leading firms to explore crypto offerings for this base. The Block reported earlier in the month that Charles Schwab is considering launching a crypto brokerage and could launch such a service by the end of the year. We believe this an indication retail interest in crypto remains robust and view it positively for the space, as it could help drive greater consumer adoption. 5
DISCLOSURES Nothing herein is tax advice. You should consult your own tax professionals in order to understand the risks of investing. The research team may own the cryptocurrencies mentioned in this report, and as such this should be seen as a disclosure of any potential conflict of interest. This report belongs to CrossTower and represents the opinions of its research team. CrossTower is not a FINRA registered broker dealer or investment adviser and does not provide investment banking services. This report is not investment advice, it is strictly informational. Do not trade or invest in any tokens, companies or entities based solely upon this information. Any investment involves substantial risks, including, but not limited to, pricing volatility, inadequate liquidity, and the potential for complete loss of principal. Investors should conduct independent due diligence, with assistance from professional financial, legal and tax experts, on topics discussed in this document and develop a standalone judgment of the relevant markets prior to making any investment decision. CrossTower does not receive compensation from the companies, entities, or protocols they write about. Compensation is not received on any basis contingent upon communicating a positive opinion in this report. The authors were not hired by the covered entity to prepare this report. CrossTower did not receive compensation from the entities covered in this report for non-report services, such as presenting at author sponsored investor conferences, distributing press releases or other ancillary services. The entities covered in this report have not previously paid the author in cash or in stock for any research reports or other services. The covered entities in this report are not required to engage with CrossTower. The research team has obtained all information herein from sources they believe to be accurate and reliable. However, such information is presented “as is,” without warranty of any kind whether expressed or implied. All market prices, data and other information are not warranted as to completeness or accuracy, are based upon selected public market data, reflect prevailing conditions, and the research team’s views as of this date, all of which are accordingly subject to change without notice. CrossTower has no obligation to continue offering reports regarding this topic. Reports are prepared as of the date(s) indicated and may become unreliable because of subsequent market or economic circumstances. The graphs, charts and other visual aids are provided for informational purposes only. None of these graphs, charts or visual aids can and of themselves be used to make investment decisions. No representation is made that these will assist any person in making investment decisions and no graph, chart or other visual aid can capture all factors and variables required in making such decisions. The information contained in this document may include, or incorporate by reference, forward looking statements, which would include any statements that are not statements of historical fact. No representations or warranties are made as to the accuracy of such forward looking statements. Any projections, forecasts and estimates contained in this document are necessarily speculative in nature and are based upon certain assumptions. These forward- looking statements may turn out to be wrong and can be affected by inaccurate assumptions or by known or unknown risks, uncertainties and other factors, most of which are beyond control. It can be expected that some or all of such forward looking assumptions will not materialize or will vary significantly from actual results. 6
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