Bitcoin: Investment Vehicles Are Quite Bearish

Investment Thesis

Whilst the Grayscale Bitcoin Trust (OTC:GBTC) has been traded at a significant discount, some trusts and ETFs have been urged to reduce their Bitcoin holdings and the daily trading volume in these assets has steadily declined. For a while, the Sharpe ratio shows that GBTC’s return on investment is rather low and that this asset appears to be quite risky.

Negative Sentiment Spreads Across Stock Markets

Since November 2021, the value of Bitcoin (BTC-USD) has tanked nearly 70% in value from the all-time high, which has many investors on edge. Meanwhile, many analysts believe that a great recession is coming, causing market sentiment to become more negative than ever. The weakness in the equity markets shown in the S&P 500 and Nasdaq 100 indices makes this most obvious, which significantly affects investment behavior in Bitcoin through regulated markets.

Looking at the Grayscale Bitcoin Trust, the share price has fallen deeply to $11.94 since its peak at about $56. At the same time, 3iQ CoinShares Bitcoin ETF (BTCQ:CA) and Purpose Bitcoin Canadian ETF (BTCC.B:CA) have also experienced a rapid drop in their share value. Therefore, investors should seriously take it into account when analyzing markets and making investment decisions.

Decreasing Interest In Bitcoin Investment Tools Regardless Of A Huge Discount In Stock Market

In the meantime, the discount or premium to NAV (Native Asset Value) is at -32.75%, which means the trust value in the stock market is cheaper than the underlying value of the Bitcoin asset about 32.75%. This massive discount allows institutional investors to purchase Bitcoin in the stock market at a lower price than its actual value.

However, the daily trading volume of GBTC has sharply dropped to 3.075M regardless of the generous discount of the shares. It implies that institutional investors may be pessimistic about Bitcoin-related investment vehicles in the regulated market or they may be just thinking that the Bitcoin downturn is not over yet.

In addition, some trusts and ETFs are gradually divesting their Bitcoin holdings in the prevailing market conditions. As an example, the total number of Bitcoins held by the Grayscale Bitcoin Trust has moved downward from its peak in February 2022. Not only that but the aggregate amount of BTCs held by various trusts and ETFs has also plummeted since May 2021 when the market reached the top.

Bitcoin Trust Has Poor Risk-adjusted Performance

In terms of return on investment, the Sharpe ratio tells us that GBTC is a poor asset with a very low risk-adjusted performance. Indeed, the Sharpe ratio’s value has gradually decreased over time and lately dipped to 0.453. It suggests that the expected return on GBTC investment is relatively low while its volatility is quite significant.

Conclusion

The current Bitcoin investment tools in regulated markets such as trusts and ETFs have shown the bearish signal to a certain extent. Although GBTC has been traded at a substantial discount, the daily trading volume keeps decreasing and some trusts and ETFs including Grayscale Bitcoin Trust have been encouraged to divest their Bitcoin holdings. Because the shares of GBTC sold or bought by institutional investors are reported quarterly, many recent trades may have not been listed yet. However, these above figures could give us some clues of what may be actually happening with Bitcoin behind the scenes. For instance, some institutional investors had bought GBTC in late June right before the July rally and retailers can only know that is a local bottom after it happened. Most importantly, the Sharpe ratio indicates that return on investment for GBTC is fairly low, and this asset looks rather risky. Investors would therefore be prepared to start hedging against the growing negative downside risk of Bitcoin at this point.