In my previous coverage of MicroStrategy’s mega-leveraged all-in bitcoin bet, the main bone of contention was that the firm’s oversized bitcoin wager risks affecting the market significantly if it fails by having MicroStrategy margin called. Such a large concentration of bitcoin owned by one single entity makes the market vulnerable to its whims.
This concentrated distribution of bitcoin wealth amongst bitcoin holders was most probably not something that Satoshi Nakomoto envisaged. But how exactly did we get from bitcoin being a new form of electronic money to being a form of digital gold?
Bitcoin was created by Satoshi Nakamoto as an autonomous means for the transfer of money. In fact, Satoshi defined bitcoin as “a purely peer-to-peer version of electronic cash.”
His white paper is about creating a money system that can be used independent of intermediaries.
However, bitcoin’s use case as a method of payment and cash transfer is minimal compared to its massive use simply and purely as a speculative bet.
In a study by the ECB published in 2014, a very strong correlation between bitcoin’s popularity and its price growth was found. Surprisingly, the study also revealed that bitcoin grew along with the shadow economy but it also came to the conclusion that the currency is more popular as a method of payment in countries with lower GDP per capita.
And according to statistics, as of 2021, the use of crypto is much higher in developing countries than in rich economies. Nigeria tops the list, with 42% of survey respondents having used cryptocurrencies, while in the USA the figure stands at just 13%.
There’s also evidence to suggest that bitcoin’s price may not going up due to mass and organic adoption, but rather by institutional players pushing the price up with speculative bets.
Enter MicroStrategy and Tesla
In September 2020, MicroStrategy made its first bitcoin purchase, immediately becoming the biggest known corporate holder. The company bought 70,469 coins at an aggregate purchase price of approximately $1.125 billion (approximately $15,964 per bitcoin), inclusive of fees and expenses. That’s a big purchase and an interesting price: within touching distance of bitcoin’s 2017 high before it plunged to below $4,000 the following year. A few months after MicroStrategy’s major buy, bitcoin’s price began to skyrocket.
MicroStrategy kept buying bitcoin but was soon joined by a new player: Tesla. In 2021, its SEC filing said it bought a total of $1.5 billion in bitcoin that year and intended to accept the crypto as a form of payment.
Read more: Explained: MicroStrategy’s margin call math
There is also another metric to consider. According to crypto analytics firm Glassnode, by the end of June this year, up to 50% of unique bitcoin wallets were in profit. The number of unique wallets peaked in April 2021 with more than 1.2 million but as of July this year, the figure sat below 900,000. We can’t verify if these unique wallets are all owned by unique persons, however, a paper by Igor Makarov, associate professor from the London School of Economics, includes some very interesting facts.
By 2020, at least 5.5 million bitcoin, a third of all supply available, were held by intermediaries defined as exchanges or financial institutions which hold bitcoin in the name of another party. This would probably be a shocking number to Satoshi considering that he invented bitcoin for the specific purpose of cutting off intermediaries.
Looks like rich folk are stacking bitcoin
By the end of 2020, individual investors owned 8.5 million bitcoin. The top 1,000 holders own 3 million bitcoin, while the top 10,000 investors own 5 million bitcoin. Most importantly, Glassnode’s study found that only 10% of all bitcoin transactions had any actual economic purpose in terms of trade.
Amongst the intermediaries, we also find a large concentration of wealth in a few hands. The biggest intermediary, considered to hold the largest amount of bitcoin, is Grayscale with its Grayscale Bitcoin Trust (GBTC).
GBTC launched in September 2013 with less than $3 million in assets under management, yet today its parent company Grayscale is a leading crypto intermediary with a total of $14.4 billion in bitcoin and up to 700,000 investors with a minimum investment of $50,000.
It also boasts multiple crypto funds, including an Ethereum trust with $4.69 billion in assets, $714 million in various altcoin funds, and a $4 million DEFI trust. Grayscale has also been proposing to turn its bitcoin trust into an ETF, however, this has been refused multiple times by the SEC.
But why would you hold bitcoin in a trust if the whole point of bitcoin was to be a “pure peer-to-peer cash”? If you own shares of GBTC, you can’t even redeem your bitcoin so it’s reasonable to assume that GBTC’s clients are wealthy entities who are betting on bitcoin’s price going up but would rather have someone else hold it for them.
These include ARK Investments Management LLC, which is the biggest client with 0.84% of all GBTC and more than six million shares, followed by Horizon Kinetics Asset Management which owns 0.34% of the GTBC shares. JPM Morgan’s institutional funds owned a lot of GBTC as of last year, even exceeding ARK’s holdings at one point with 13 million in total.
However, as of late last year, JP Morgan’s funds seem to have wound down their GBTC positions significantly with one unloading most of its 3,642,118 shares.
Bitcoin’s going cheap through GBTC
But America’s biggest bank isn’t the only one selling GBTC. Grayscale has sold at a discount on its NAV ever since late February this year. This basically means there’s an excess supply of shares outstanding compared to demand. At the time of writing, GBTC’s discount to NAV is a whopping 30% which means that you can buy bitcoin 30% cheaper through a GBTC share.
This discrepancy may be due to the fact that GBTC is not an ETF and therefore its outstanding shares are not equal to the outstanding demand. However, GBTC may also be in some trouble of its own.
According to a recent analysis by DataFinnovation, it appears that Digital Currency Group (DCG), GBTC’s parent company, has been buying GBTC shares. DCG apparently bought up to 18 million shares of GBTC from March 2021 to March 2022. This purchase coincided with now-bankrupt crypto hedge fund Three Arrows Capital (3AC) selling 15 million of its GBTC shares.
At the same time, bitcoin’s price was increasing and the GBTC sold at a premium. Genesis, which is also owned by DCG, was loaning bitcoin for people to create GBTC. This seems odd, given that the bitcoin holder would lose the premium at which GBTC’s NAV traded when bitcoin’s price was soaring.
Genesis stopped loaning bitcoin to create GBTC shares when the NAV traded at a discount. Bizarrely, 3AC handed the bitcoin — which was loaned by Genesis — back to Genesis to be converted to GBTC shares. Then 3AC used these as collateral to take USD loans from Genesis.
At face value, it seems that 3AC was given the funds by DCG to leverage GBTC’s premium hoping it would keep going higher: a circular self-consuming bet. With 3AC now in the process of liquidation, it remains to be seen what the full ramifications for GBTC will be.
So, is bitcoin becoming a rich man’s casino? Comparing price action with the moves by major players seems to confirm this. And it may also explain why bitcoin is so volatile. Big players and big moves can shift the bitcoin market significantly or rather exacerbate the trend. Having a bear market that could flush out over-leveraged financiers from the market could be in tandem with Satoshi’s principles but it may not be good for the price.
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