25th November 2023 > > LINK (Chainlink).

tl;dr

A pricing anomaly that cannot be arbitraged away, but perhaps it has some important information for us.

Market Snap

Market Wrap

An overnight spike to $38.4k is exciting by setting a new high for the year. The last time we saw these prices was in May 2022 which was followed by six months of doom and gloom.

Curious Cryptos’ Commentary – LINK (Chainlink)

It is rare that the CCC focuses on specific alts – the CCC is not the crypto equivalent of a stock picking service and has no ambitions to be so. But from an educational perspective, sometimes it is good to focus on specific alts. KEY, XRP, IOTA, LINK, and others have come up in our earlier discussions.

I have been alerted to an interesting anomaly which – apart from one obvious justification with which you might disagree – I am struggling to explain. And this is no run of the mill anomaly. Pricing wise it is a once in a lifetime event.

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Grayscale has several crypto related trusts, all focussed on just one crypto. The largest and most familiar is GBTC – the Grayscale BTC Trust which is well on the way to being converted into an ETF.

Trusts work by investors placing money with the manager, who then buys the underlying assets, and issues shares in the trust to that investor. Those shares are tradable on the secondary market, but – and this is a key point to understand – the shares will trade at a premium, or a discount, to the underlying asset.

The reason for this is simple – there is no, or almost no, mechanism to arbitrage the premium or discount, in stark contrast to ETFs, which track the underlying to a remarkably accurate degree.

Regular readers already know that GBTC was trading at a 50% discount or so to the spot price of BTC a year ago. Investors in GBTC were buying BTC at $8k and not at $16k in the spot market. Personally, I would have been all over that trade, but the UK regulator does not recognise U.S. securities laws, though they are the most stringent and most draconian in terms of loss of liberty compared to anywhere else in the world.

That discount is now in the single digits in anticipation of the conversion of GBTC to an ETF, at which point the discount goes to zero, give or take. Doubling your returns by buying GBTC instead of BTC (with the added advantage of completely secure custody) was the no-brainer trade of 2023, as frequently referenced in the CCC this last year. But, like I say, the FCA stopped us Brits from getting involved.

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Grayscale also has a LINK trust – GLNK. Peruse this screen grab if you will

If numbers give you a bit of brain fog, there are three key bits of information here. Let’s take them one at a time.

First, we can see in the bottom right that the number of LINK per share in this trust is 0.93. So, each share is worth a touch less than each LINK (fees of 2.5% per year and other costs will be mostly responsible for that discrepancy).

Secondly, we can see that “HOLDINGS / SHARE” (top left) is $13.61.

How is that calculated? Well, the price of LINK is $14.58 at the time of writing. 93% of that is $13.56 which almost gets us there, but of course the spot price at the close of 22nd was slightly different to now.

Now the interesting bit.

The “MARKET PRICE / SHARE” is … drum roll … $44.99, over $30 more than it “should trade at”, as you can see in the bottom left corner of the screen grab above.

You don’t believe me? Here is a screenshot from CNBC:

A trust whose underlying assets are worth $13.61 in the spot market is trading at $44.99. That’s a premium of 230%. What we are seeing here is quite extraordinary, at least in my finance and banking experience.

Wait, what? I hear you cry. How can that be so?

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Let’s step back and look at LINK itself:

https://chain.link/

I am not going to deep dive into LINK for you, but the executive summary is that LINK is a blockchain agnostic provider of data – an oracle in Web3 terms. Make no mistake – Web3 cannot work without oracles, and LINK appears best placed to take advantage of the Web3 revolution.

For disclosure purposes, the CC Treasury has been investing in LINK since 24th June 2019. After publication of this CCC tomorrow, I will be asking the CC Treasury Committee to upgrade the ongoing investment in LINK, but I don’t always get my own way. In any case, that is a personal point of view, and is not investment advice.

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I mentioned earlier that the difference between the underlying value of a trust and its market price cannot be arbitraged away, at least not in any meaningful sense. What we have here is an excess of demand for LINK from those who cannot buy it on spot markets.

If we look at retail investors, those who would be interested in LINK already know how to self-custody, or at least how to buy and custody on an exchange, so this premium cannot be retail driven.

Institutional investors are largely prohibited from buying spot, or do not have the custodial capacity to buy spot. I believe – and you may disagree – that the demand for GLNK is coming from the more aggressive institutional investors. Hedge funds, family funds, maybe some crypto trading desks, even at this almost ridiculous premium.

If my hypothesis is correct, and these institutional investors are right – and yes, that “if” is doing a lot of heavy lifting here – what does that tell us about the possible future direction of the price of LINK? Answers, as always, on a postcard to CC Towers.