GDLC: Too Cheap To Ignore Again

Summary Bitcoin and other crypto-based products have experienced significant price increases since the approval of spot ETFs in the US market. Altcoin funds offered by Grayscale are trading at enormous premiums to the net asset value, indicating speculative mania. The Grayscale Digital Large Cap Fund presents an arbitrage opportunity as it again trades at a 37% discount to its net asset value. If you haven't read my recent article for Seeking Alpha covering MicroStrategy Incorporated ( MSTR ) stock, I would invite you to consider reading it through and also perusing the comment section. It's been a little over two months since the spot Bitcoin USD ( BTC-USD ) ETFs were approved for the US market and the price action in BTC and several BTC proxies like MSTR has been incredible to say the least. Data by YCharts Bitcoin is up over 40% and MSTR shares are up about 200% since the ETFs were approved. Much of what is driving the returns in BTC is the enormous flow of capital to the new US-based spot funds. A byproduct of the excitement about BTC has been what is, in my opinion, irrational exuberance in some of the other crypto-based products in the market. And I think some of the comments in that MSTR article highlight that irrationality pretty clearly. We see this in other tickers as well. I've covered enormous premiums to crypto asset values in other articles for Seeing Alpha over the last few weeks: Grayscale Solana Trust's 800% Premium Is A Massive Sell . Grayscale Bitcoin Cash Trust: Still Playing With Fire . I can't stress this point enough; in my opinion, there is no justifiable reason for price premiums on funds (or stocks) that hold crypto assets that are not earning yield either through staking rewards or through providing liquidity to DEX/lending protocols. Froth Is Back If there was any doubt about "crypto winter" being over in December 2023, that doubt should be gone at this point. With the exception of Grayscale's top two non-ETF single asset funds by market capitalization, every single altcoin fund that Grayscale is offering is trading at least double the net asset value of the underlying digital assets represented by the products: Grayscale Single-asset Fund Ticker NAV Share Price Premium Rate Ethereum USD ( ETH-USD ) ( ETHE ) $32.72 $26.79 -18.1% Ethereum Classic USD ( ETC-USD ) ( ETCG ) $24.72 $14.64 -40.8% Litecoin USD ( LTC-USD ) ( LTCN ) $7.48 $25.24 237.4% Bitcoin Cash USD ( BCH-USD ) ( BCHG ) $3.57 $10.35 189.9% Solana USD ( SOL-USD ) ( GSOL ) $67.23 $394 486.1% Decentraland USD ( MANA-USD ) ( MANA ) $5.86 $47.94 718.1% Grayscale Livepeer Trust (LPT) ( GLIV ) $17.42 $37 112.4% Stellar USD ( XLM-USD ) ( GXLM ) $11.61 $56.95 390.5% ZCash USD ( ZEC-USD ) ( ZCSH ) $2.49 $7.46 199.6% Grayscale Horizen Trust ( HZEN ) $1.19 $7.54 533.6% ChainLink USD ( LINK-USD ) ( GLNK ) $17.18 $122.50 613.0% Basic Attention Token USD ( BAT-USD ) ( GBAT ) $2.84 $24.24 753.5% FileCoin USD ( FIL-USD ) ( FILG ) $8.33 $195 2240.9% Source: Coinglass, 3/21/24 closing figures In my view, there is just no other way to view this than as a speculative mania. Perhaps these traders are simply expecting someone else to pay a higher premium for the shares. Perhaps there is an expectation that the underlying value of the fund will grow into the market price. I don't know. I'm floored that this is still going on if I'm being totally honest. But there is a shelf-life on this. It may take a year from the recently opened private placements in these funds for the share prices to correct. But in my view, the eventual depression of these premiums is the closest thing to a certainty that we have in the market today. GDLC Market vs NAV (Grayscale) This froth for altcoin exposure has not translated to the Grayscale Digital Large Cap Fund ( GDLC ) which closed on March 21st at a 37% discount to the net asset value of the fund. For me, this fund is once again an interesting arbitrage opportunity. Grayscale Digital Large Cap Fund I've covered GDLC for Seeking Alpha a handful of times over the last 18 months and my thinking can be generally summed up in this way; it's not a great product for diversified crypto exposure given how little the altcoin allocation is, but what it lacks in diversification it makes up for in being one of the cheapest crypto-proxy assets in the public markets from a NAV discount standpoint: Asset ASSETS/SHARE WEIGHT Bitcoin 0.00037618 69.33% Ethereum 0.00230872 22.39% Solana 0.00822414 4.14% Ripple USD ( XRP-USD ) 1.0367784 1.87% Cardano USD ( ADA-USD ) 0.67920129 1.21% Avalanche ( AVAX-USD ) 0.00699889 1.06% Source: Grayscale, as of 3/21/24 You can see in the table above, Grayscale now has six assets in the fund yet GDLC is still over 90% allocated to Bitcoin and Ethereum. Given the massive surge in the price of Solana from the lows, SOL has become the third largest coin in the fund with a 4.1% allocation. Those who have followed my previous work on this fund may recall I've modeled the way I personally value the fund with price adjustments that correlate with the NAV rates for Grayscale's single-asset funds. This time around, I'm going to provide a couple of different methods for that model because Grayscale's Bitcoin fund has since converted to an ETF. GDLC Value Adjustment Models The standard way that I've adjusted the GDLC share value is by writing down all of the smaller altcoin positions and rerating the BTC and ETH based on the NAV rates from Grayscale's single asset funds. If we do that again, GDLC's fair value calculation looks like this: Asset Asset price Holdings/Share $ Val/Share Adjusted Val BTC $63,570 0.00037618 $23.91 $23.91 ETH $3,332 0.00230872 $7.69 $6.31 SOL $171.2 0.00822414 $1.41 $0.00 XRP $0.61 1.0367784 $0.63 $0.00 ADA $0.62 0.67920129 $0.42 $0.00 AVAX $53.49 0.00699889 $0.37 $0.00 Share Value $34.44 $30.22 Source: Author's Calculations, Grayscale's shareholding data, intraday 3/22/24 In this table, Bitcoin's discount rate is now zero due to the conversion of the Grayscale Bitcoin Trust (BTC) ETF ( GBTC ) to an ETF. The Ethereum discount is 18% per the closing valuation on March 21st. The rest of the coins have been zeroed out and we get an adjusted share value of $30.22 - a 35% premium to the closing price on March 21st. The possible issue with this method is that GBTC is no longer a closed-end product. In a second attempt at creating a NAV rate adjustment for the Bitcoin, I'm using the discount in the Osprey Bitcoin Trust ( OBTC ): Asset Asset price Holdings/Share $ Val/Share Adjusted Val BTC $63,570 0.00037618 $23.91 $21.76 ETH $3,332 0.00230872 $7.69 $6.31 SOL $171.2 0.00822414 $1.41 $0.00 XRP $0.61 1.0367784 $0.63 $0.00 ADA $0.62 0.67920129 $0.42 $0.00 AVAX $53.49 0.00699889 $0.37 $0.00 Share Value $34.44 $28.07 Source: Author's Calculations, Grayscale's shareholding data, intraday 3/22/24 In this attempt, the BTC adjusted value is marked down by 9%, which again is in line with OBTC's closing price from March 21st. Using this valuation method, we get an adjusted share value of $28.07 - a 25% premium to the 3/21/24 close. Of course, there is also Solana in GDLC and Grayscale does have a single-asset Solana fund. Just for kicks, and perhaps to show the absurdity of these pricing inefficiencies all over this market, I decided to build another rerating the SOL value in GDLC, this time up in line with GSOL : Asset Asset price Holdings/Share $ Val/Share Adjusted Val BTC $63,570 0.00037618 $23.91 $21.76 ETH $3,332 0.00230872 $7.69 $6.31 SOL $171.2 0.00822414 $1.41 $6.84 XRP $0.61 1.0367784 $0.63 $0.00 ADA $0.62 0.67920129 $0.42 $0.00 AVAX $53.49 0.00699889 $0.37 $0.00 Share Value $34.44 $34.91 Source: Author's Calculations, Grayscale's shareholding data, intraday 3/22/24 Here we're still using the OBTC discount for the Bitcoin. But now we're also revaluing the SOL in GDLC 486% higher to reflect what the market believes Grayscale's Solana in GSOL is worth. With this model, GDLC should trade at a premium to NAV. To be clear, I don't think GDLC should trade at a premium . But even if we just take the average of the first two models, GDLC shares should be trading closer to $29 per share yet we can buy it for about $22. Risks Though it has worked in the past, this valuation adjustment model is just a theory and should be viewed as such. GDLC still has a high degree of risk and is very unlikely to be converted to an ETF any time soon. Just because other crypto-proxy products trade at enormous premiums, it does not mean GDLC will trade like them. Like other Grayscale funds, GDLC is arguably way too expensive with its 2.5% management fee. Additionally, there is an opportunity cost in buying GLDC as a long-term investment due to the fact that the fund's assets are not staked for passive yield even though they could be very easily. Finally, it's possible that the NAV discount closes while the NAV itself declines far enough that arbitrage traders could still come out behind. Summary I like this trade again and I've re-entered it in recent weeks. If you like single-asset funds at 100-500% premiums, you have to love the idea of being able to buy many of the same cryptos at a discount. But I have to stress, that just because this worked very well the last time I highlighted the opportunity, it doesn't mean it will work again. But for my money, it's a worthy speculation given all of the exuberance elsewhere in the market. GDLC is currently the only Grayscale product that I have any exposure to.