Some Bitcoin Premiums are Melting Away (For Now At Least); That is a Little Spicy, but Also Potentially Delicious Depending On Your Tastes

The GBTC and KimChi premiums (explained below) are at some of the lowest points they have been in months. How one should interpret that is in question.

First off, let’s explain the “GBTC and KimChi premiums.”

  1. The GBTC premium is the market-dictated premium paid by investors of Greyscale’s Bitcoin Investment Trust (which trades under the symbol GBTC on the public market). GBTC is the only way for retail investors to get exposure to Bitcoin via the traditional stock market, and the crowded asset and Bitcoin mania as led to a premium over time. See: Understanding the Bitcoin Investment Trust.
  2. The KimChi premium is a name given to the market-dictated premium paid on cryptocurrency in South Korea in general. I can’t fully understand why crypto trades at a higher price in South Korea, but it does… and the premium they pay has been dubbed “the KimChi premium” by South Koreans. See: KimChi Premium. The hidden history of cryptocurrency in Korea.

These premiums essentially correlate with the demand for Bitcoin at a given moment. When demand is low, the premiums tend to melt away, when demand is high, they tend to become exaggerated. This is especially true for the GBTC premium, which at times has been above 100% of the value of the Bitcoin actually held in the trust (see the historic GBTC premium at Greyscale.co).

Although one would assume that the premium melting away means Bitcoin is going down, that isn’t necessarily true. It more means that Bitcoin has been going down and is perceived as going down (it doesn’t mean it will keep going down; it is reactive, not necessarily predictive). It is sort of like RSI on the daily candles (feel free to Google that), it tells us what the trend so far is, and it hints at what the trend could be next, but it doesn’t necessarily tell us about the future.

Like with RSI, these premiums have almost always necessarily been at their lowest right before a reversal. The Kimichi and GBTC premiums were very low back in early February when BTC bottomed out around $6k. They were also low back in September after the late August / Early September 2017 correction. In both cases the premium reduction marked a good time to start building a position, not the end of times (although, this time could be different).

With that said, I’ve seen both premiums much lower. They are not at all-time-lows, they are simply trending in that direction. In general, and especially with GBTC, the lower it goes, the better buy the underlying asset is historically speaking (again, I can’t see the future, history does not have to repeat).

With all this said, here are some important notes.

  1. The GBTC premium is still somewhat absurd. A share of GBTC has a fair market value of $6.70, it trades at $10.55 as of this moment (but don’t let that alone stop you from investing in it or cause you to sell it, the premium has been much higher in the past; please see the next points).
  2. The KimChi Premium has never been that significant (although it has historically caused CoinMarketCap to show slightly higher prices than it otherwise would, which doesn’t necessarily help people have a realistic view of the market… especially true for new investors at the hight of the December 2017 – January 2018 mania).
  3. The both premiums can actually be a HUGE benefit when prices rise. At the best of times it means South Koreans and GBTC investors can actually outpace other BTC investors in gains (because when the mania is in full force their assets rise along with BTC, but a little bit more due to the increase in the premium). Consider, GBTC went from about $570 in September 2017 to $3,700 in December 2017 when BTC went from $3.2k – $20k in the same time period (do the math, GBTC preformed a little better than BTC… because of the increase in its premium). NOTE: GBTC split 91-1 since its highs, so what was $3,700 then would be more like $40.00 now, that can be confusing, but it is the case.
  4. At its worst though, these premiums can do some really gnarly things. 1. They can result in bigger losses than BTC at fair market price (because the melting premium offers more room to go down). 2. They can result in stagnation on those markets when BTC makes gains but premium growth stagnates (I’ve seen this happen to GBTC, it can be frustrating to watch Bitcoin make big gains and GBTC stagnate after a correction).

It is hard to say what the best move is based on this data, but there have been a few times in history where these premiums acted as a useful indicator. Just keep in mind, these premiums aren’t the lowest they have ever been. However, especially with GBTC, if you see that premium continue to melt away, consider what that could be saying about Bitcoin as an investment.

In my opinion, the lower the GBTC premium gets, the better buy it is, but the more risky it is (because it being a “better buy” is based on the assumption that Bitcoin will rise again and so will the GBTC premium… and neither one of those is a certainty; especially if other publicly traded crypto products come out).

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