Summary I previously called BCHG overvalued, but it has outperformed BCH and the S&P since then, despite my incorrect predictions. BCHG's NAV premium remains high at over 100%, making it akin to paying $2 for $1, which I find unjustified. Grayscale's private placements have increased BCHG shares by 23% YTD, with restricted shares unlocking in February 2025, potentially normalizing the premium. Growing short positions in BCHG indicate bearish sentiment; I recommend direct BCH allocation over BCHG due to high premiums and upcoming share unlocks. I'll get the mea culpa out of the way before we get into updated data for the Grayscale Bitcoin Cash Trust ( BCHG ). In early December 2023 , I called the then 43% premium to NAV the market was assigning BCHG shares overvalued and unwarranted. I even posited that it made more sense to fade BCHG and long the coin more directly if investors were truly bullish Bitcoin Cash ( BCH-USD ). Performance 12/5/23 - 9/24/24 (Seeking Alpha) Not only have I been dead wrong about BCHG's inflated premium since that December article, but BCHG has outperformed both BCH and the S&P since that time. Between December and early April, the market took the BCHG NAV rate premium from slightly over 40% to just under 300% at the peak. Performance 3/6/24 - 9/24/24 (Seeking Alpha) However, I'll also note that since reiterating my caution on the Grayscale Bitcoin Cash Trust in early-March, we do indeed see BCHG slightly below that second 'hold' call dating back to last year. But I'll own it again; there was a rocket ride up to $23 per share for BCHG in-between my March article and today. Thus, I'm still considering that call a major miss. Furthermore, BCH has under-performed BCHG since the March article and now trails even the index as well. But like any glutton for punishment, I'm back with a third attempt at proclaiming BCHG overvalued at the current market price. Though now, I suspect longs are running out of time to capture what is left of the fund's juicy premium. Current NAV Premium BCHG Premium Rate History (CoinGlass) There is no question the price of BCHG shares has been volatile over the last 12 months. That volatility has allowed the fund to trade at a massive premium to NAV. While that premium has come down considerably in the last five months, I'd argue it's still way too high at current levels. At a closing price of $6.31 per share on 9/24 against a NAV of $2.94, BCHG shares continue to trade at more than double the underlying value of the fund. I'll reiterate once again that buying BCHG at the most recent closing price is no different from paying $2 to buy $1. Doing so is justified with the assumption that someone else will pay more than $2 for a $1 or that the $1 in the fund will double in value. You could talk me into the latter happening. The former is likely more dubious given the share supply that I expect to come to market in Q1 next year. Private Placements Earlier this year, Grayscale reopened private placements in nearly every single-asset fund that the company offers. To explain this as simply and easily as I can, Grayscale's non-ETF products are closed end funds. During times of NAV rate discounts, there is very little recourse for shareholders to close the rate to 'fair value' if sellers are more motivated than buyers. However, when the funds trade at large, sustained premiums to NAV, Grayscale allows accredited investors to buy BCH at NAV and place the newly purchased crypto into the Bitcoin Cash Trust in exchange for newly issued shares. In doing this, private placers have an immediate paper gain on the investment, provided the fund shares continue to trade at a NAV rate premium in the secondary market. The catch is private placers must wait out a 12-month share lockup before they can capture the premium by selling new shares via OTC secondary. Grayscale BCH Holdings (Coinglass) Since private placements were reopened for BCHG in Q1 of this year, we've seen approximately 64k BCH come into the fund from a starting level of roughly 300k BCH in mid-February. Shares outstanding have grown from 34.8 million at the end of 2023 to 42.8 million as of September 24th. Thus, shares in the fund have grown by roughly 23% year to date. This is certainly not the worst private placement pile-on from accredited investors that can currently be observed in the Grayscale single-asset altcoin funds. But given BCHG is Grayscale's 2nd largest single-asset product of this type by AUM, I suspect BCHG will be one of the first Grayscale funds to normalize when restricted shares start coming out of lock in February 2025. Shares Sold Short Perhaps adding credence to that theory is the growing position in BCHG shares sold short according to OTC data. BCHG Short Position (OTC, Grayscale, Author's Chart) Going back to the beginning of May, we've seen shares sold short as a percent of shares outstanding more than double, from about 3% to nearly 8%. To be clear, I would not personally advocate for shorting Grayscale funds due to the fact that premium rates can move so high, and the underlying assets can also move up in price very quickly. I wouldn't say that I'm seeing justification for an explosive move in BCH given the on-chain data that I follow, but in a rate cut environment with expectations for growth in global liquidity, anything can happen. But I do think the increase in short selling is a signal that BCHG holders shouldn't ignore. Final Takeaways In closing, value is certainly subjective. Just because I think a 100% premium to NAV is silly, it doesn't mean the market has to agree with me. In fact, the market has shown over the last 9 months that it doesn't agree with me. Regardless, I'm going to remain stubborn on this 'hold' call because I see unlocks on the horizon. I see bearish bets getting more aggressive. And I see this happening in a fund that is one of Grayscale's more liquid of its single-asset altcoin product offerings. I have no beef with Bitcoin Cash. I actually hold some in a crypto IRA. And I think that's the biggest issue I've had with the high premiums for these funds in this cycle. There are numerous other ways to get tax-advantaged exposure to altcoins compared to the last bull cycle. Grayscale was largely the only game in town during the 2020/2021 run. That's not the case today. From here, I see BCHG rallying to higher prices longer term, only if it gets dragged up by BCH. Thus, given the premium, I say direct BCH allocation is the better way to express that idea. In five months, BCHG share supply is coming to market. And it sure looks to me like the shorts are already sniffing that out.
