Summary Grayscale's Bitcoin Cash Trust is trading at a large premium to net asset value. The higher the AUM, the less extreme the premiums should be, BCHG appears to be bucking that thesis as a top 5 single-asset Grayscale fund. I wouldn't buy BCHG unless you feel really strongly that BCH is going much higher. But if you take that view, you may do better with a crypto IRA instead. One of the funny internet memes that has become popular in the last few years is a screengrab of a scene from the 2004 video game Grand Theft Auto: San Andreas. Grand Theft Auto: San Andreas (KnowYourMeme) Here we go again. When properly used, the meme is meant to convey fatigue from the perspective of someone who is having to fight a familiar battle once again. This sentiment is how I currently feel about Grayscale Bitcoin Cash Trust ( BCHG ). If you've been a latecomer to the Grayscale funds, or if this is your first cycle with exposure to crypto, there's a chance you only remember these funds trading at deep discounts. But let me tell you, before Grayscale funds traded at silly discounts, they traded at preposterously silly premiums. In fact, the first time I covered the Grayscale Bitcoin Trust ( GBTC ) for Seeking Alpha, it was a warning for investors to be mindful of GBTC's then 30% premium. Now that bulls are back in control of the crypto market, we're starting to see the funds trading at premiums again. Some of those premiums are once again getting preposterously silly: Data by YCharts The chart above is showing the NAV premium for the Grayscale Filecoin Trust ( FILG ). That premium is currently 681%. The premium has nearly tripled since I covered FILG in June 2022. The price of the fund shares have actually doubled even though FileCoin ( FIL-USD ) itself is down 35% in the last 18 months. The biggest problem here is fund illiquidity. FILG has about a half a million dollars in AUM. Which is a small fraction of the AUM of Grayscale Solana Trust ( GSOL ) which currently trades at about a 300% premium to net asset value. The higher up we go in AUM, the less extreme these premiums should be. Hence, my concern when I see the 40-50% premium we're currently seeing in Grayscale's Bitcoin Cash Trust. Grayscale Bitcoin Cash Trust Similar to how Grayscale's other single-asset funds work, Bitcoin Cash ( BCH-USD ) fund is designed to simply hold BCH under custody with Coinbase ( COIN ) through cold storage. The inception date of the fund was March 1st, 2018 and the fund's shares began trading on secondary in August of 2020. Ticker: BCHG AUM: $75 million Shares Outstanding: 34.8 million BCH per Share: 0.00865789 Management Fee: 2.5% It's a pretty straightforward fund objective. BCHG intends to track the performance of the crypto asset BCH. Given the amount of BCH per share, which changes daily, each share should theoretically track with the price of BCH. As of article submission, that price is approximately $250 per coin. Thus, BCHG shares have a little over $2 in BCH allocated per share yet the fund shares closed above $3 as of December 5th, 2023. There is certainly a case to be made for going long Bitcoin Cash before a new crypto bull really takes off. I've covered BCH for Seeking Alpha a couple of times in the past and I'll get into updated thoughts on the coin itself later in the article. However, even if one likes BCH, there is a very different fundamental setup for BCHG at this point in time. Like several of the other trusts that have traded at preposterous premiums in the past, so too have BCHG shares. BCHG NAV Ratio (CoinGlass) The Bitcoin Cash fund has one of the more egregious NAV rate histories of the early Grayscale funds. At one point in late 2020, BCHG traded at a 1,800% premium to the value of the underlying assets. While it isn't trading a premium that large now, there is no question it's overvalued given the 43% premium to NAV given its position as a top 5 Grayscale single asset fund by AUM: Grayscale Fund Share Value Share Price NAV Rate GBTC $39.20 $34.99 -10.74% Ethereum ( ETHE ) $21.70 $18.47 -14.87% Ethereum Classic ( ETCG ) $16.68 $11.94 -28.40% Litecoin ( LTCN ) $6.31 $9.41 49.11% BCHG $2.18 $3.12 43.37% Source: Grayscale, Google Finance, Author Calculations From a NAV rate standpoint, what we're currently seeing in Grayscale's Litecoin and Bitcoin Cash funds are a sign the markets may be getting out of hand. Why Is This Happening Again? In my view, there are a few reasons why buyers may be willing to pay a premium for these shares: They're simply not sophisticated investors and haven't done the math on the premium. They believe the underlying asset is going much higher and are okay with paying a premium if the value of the shares catches up and continues appreciating. Even with the high management fee, a modest premium is still theoretically viable so long as the shares are traded in a tax-advantaged account. I can't reason away number 1. Number 3 does make some sense but not at a 43% premium. Number 2 is the one that I can address further. I would caution speculators who are buying BCHG at a premium who believe there will be a greater fool to sell to at a higher price. Unlike during the last crypto bull run, there are now many different ways to invest in crypto and crypto proxies through tax advantaged accounts. Investors can open crypto IRAs through companies like iTrustCapital, Choice by Kingdom Trust, and Alto. The point is, Grayscale is no longer the only game in town for crypto investment. So I question the logic in premium rates this high. Fade BCHG, Buy Bitcoin Cash? Of course, if you think BCH is going much higher than the current $250 price per coin, then buying BCHG at $3 could theoretically make sense. Bitcoiners aren't going to like this, but you could make the case that BCH is interesting at this point in time. Bitcoin Cash Active Addresses (IntoTheBlock) What has been a fairly lackluster daily active address figure for Bitcoin Cash compared to Bitcoin has admittedly gotten a bit more interesting in recent months. After DAUs fell to multi-year lows during crypto winter, the trend has started to turn around: Date Active Addresses 2017-12-18 264,262 2023-10-23 224,393 2023-12-04 209,444 2017-12-25 201,835 2023-10-09 200,208 Source: IntoTheBlock Furthermore, the outliers are very interesting. Going back the last 6 years, 3 of the top 5 days for active addresses on Bitcoin Cash have come in the last two months. Investor Takeaways Aside from a handful of altcoins that have staged magnificent rallies in the second half of 2023, Bitcoin continues to eat the crypto market. Bitcoin dominance has remained near multi-year highs as the markets speculate on a spot ETF approval in the coming weeks/months. You could certainly sell me on Bitcoin Cash being an interesting trade down here, but I simply can't justify chasing the Grayscale Bitcoin Cash Trust at a 43% premium. If you're looking to invest in BCH while minimizing taxes on trades, I would consider looking into a crypto-focused IRA before buying Grayscale funds at such large premiums.
