GBTC Trade

One trade strategy that I've been interested in learning more about is the Basis Trade.  By creating a neutral position with opposing trades and earning fees on the positions, you can be market neutral and not care about market fluctuations and still earn money.

I first heard about the basis trade when learning about how Bitmex worked.  In the perpetual market, you can buy long or sell short an asset without actually owning that asset.  Since these order books are not connected to the actual asset, the market you are trading at is bound to diverge from the actual price.  If the price fluctuates away from the market price the traders on the over-priced side pay an hourly fee to the traders on under-priced side and vice versa.  This incentivizes traders to open trades on the side of the book to move the price back in line with the market price.  Bitmex was the first I heard doing this model and became a huge Bitcoin trading venue using it, since you can lever way up with the risk of getting closed out if the price moves against you.

An interesting trade I've been thinking about is going long on GBTC in the stock market and shorting BTC at the same time.  GBTC is currently trading at $11.61 (equaling a price of $11,610 per BTC since 100 shares correlates to 1 BTC) and the spot price is currently $19,053.  This is a discount of 39%.  Assuming the SEC allows GBTC to convert to an ETF or Grayscale allows redemptions of shares for BTC, this price gap should close and become somewhat the same.

In thinking about this trade, you would need to have a guess of whether the rules will change.  My assumption is that the current SEC may want to make this move before the next election cycle.  If not, it would probably happen during the next cycle.  A guess may be a 30% chance in the next 2 years and an 80% chance in the next 6 years.

GBTC currently charges a 2% annual fee that would eat away at some of the gains.  The perpetual funding rates are harder to determine since market sentiment of traders is what drives the direction and magnitude of the rates.  When the market is bullish you can make money by being short and when the market is bearish you would lose money by being long.  Recent history is extremely bearish.  A simple approach may just be to assume that traders will want to speculate on the bullish side and assume that the funding rate may match the GBTC fees and cancel each other out.  This would mean only earning money when the gap between GBTC and spot closes.

If we assume a $10k long on GBTC without any leverage and a $10k short on perps without any leverage, you could buy 861 shares of GBTC and short 0.52 BTC.  If the gap closed, the 861 GBTC shares would be worth $19.05 from the original price of $11.61, and you would earn $6,402, giving you a return of 32% on your original $20k.  This would give you a ~15% annualized return if it happens in 2 years, and an annualized return of ~4.5% if it happens in 6 years.

How could you lose money on this trade?  If the perp market you are trading in goes super bearish over the trading time, you would lose fees to the market. Also, the SEC may never approve the conversion to an ETF or Grayscale may never allow redemptions.  Finally, the prices on the 2 assets could diverge even further as owners lose faith in GBTC and sell out of it.

If I had conviction that the SEC would approve the ETF in the next 2 years, I think I would definitely make this trade.  In the meantime, I'm still pondering.  Perhaps with leverage the returns may look good enough over the longer time frame to make it worth it.