Grayscale’s cryptocurrency funds premium rates hit new lows after the market plunged by an average of 20%. Previously, U.Today reported that all Grayscale funds with tracked premium rates went negative after the LTC fund fell below zero. For now, Litecoin’s fund premium rate remains at a positive 7%, while Bitcoin‘s fund premium falls closer to 20% negative.
What does a negative premium rate mean for a fund?
The premium rate is the value that changes in accordance with the spot price of an asset. Whenever premium rates are declining, traders usually reconsider their investment into the fund since it performs worse than the spot asset. The main point of the managed fund is to effectively follow spot assets without holding assets in periods of bear markets or corrections.
How does the market react to negative premium rates?
A fund’s negative premium rate might be a signal for investors to both exit and enter the market. In accordance with the current state of the market, if the fund’s premium rate keeps moving in the negative zone even after a price drop of the spot asset, traders will most likely consider buying the fund’s shares as if the market were oversold. But it is important to note that the behavior of private and institutional investors differs greatly. A negative premium rate will most likely alienate institutions from investing in cryptocurrency funds.
The largest fund at Grayscale Investments is the Grayscale Bitcoin Trust, which has held a negative premium rate since February 2021. Previously, all of the major cryptocurrency funds hit negative rates.
Since Bitcoin’s negative movement did not work in favor of the trust’s premium, the NAV (net asset value) of the trust has not changed. Whenever the fund’s premium rate flips positive, Grayscale starts attracting more institutional investors. However, the fund may also become attractive even at an extreme negative rate since it may be considered “oversold” by market participants. In order to enter the fund, investors have to pay $50,000, which is a relatively large sum for retail investors.