TLDR: Lido’s Staked Ether (stETH) is currently trading at a 3% discount to Ether (ETH). And the Grayscale Bitcoin Trust (GBTC) is trading at a 30% discount to bitcoin (BTC). You can buy them now, betting that you can redeem them for full price later.
Sam Bankman-Fried, the young, unruly-haired billionaire, made much of his crypto fortune by trading the “Kimchi bounty.”
SBF noticed that bitcoin prices on South Korean exchanges were slightly higher than elsewhere. A savvy trader could buy bitcoin in the United States, sell it on a South Korean exchange, pocket the difference, and repeat until rich.
This strategy, known as arbitration, finds where the market is inefficient, valuing the same asset differently. This usually comes with an added risk: in the case of the Kimchi premium, you had to trust South Korean exchanges with your money. But if things work out, great fortunes can be made: just ask Sam.
Currently there are two arbitrage games available for BTC and ETH investors. As BTC and ETH are the two assets in our Blockchain Believers wallet, this is a way to buy them at a “discount”, although this discount carries additional risk.
I will explain at a high level how these investment strategies work and how to apply them.
The stETH/ETH Arbitrage Game
Regular readers of our newsletter know about the planned upgrade to Ethereum, aka Fusion, which will migrate Ethereum from energy-consuming proof-of-work (PoW) to energy-efficient proof-of-stake (PoS). This is a milestone in the history of cryptography.
The new Ethereum will allow you to earn rewards by running a “verifier node”, but this requires 32 ETH (about $40,000 at current prices) and a lot of technical knowledge. Walk in Swimming poolwhich brings together many small investors to run its own nodes, sharing the rewards.
In other words, you can stake any amount of ETH with Lido and receive similar staking rewards as big Ethereum players. This has made Lido incredibly popular: around a third of all currently staked Ethereum passes through Lido.
When you stake your ETH in Lido, you receive another token called Staked Ether (stETH) in return. If and when the Ethereum upgrade occurs, you should be able to trade stETH for ETH in a 1:1 ratio.
For this to work, you make a number of bets:
- The Ethereum Upgrade Will Actually Happen. It seems likely (the first tests were successful), and it is currently planned for September. But the launch date has already been pushed back several times, and there’s no guarantee that will happen at all.
- The Lido will always be there. With the volatility of the market, Lido could encounter financial difficulties. This however seems unlikely, given that Lido’s business model is different (in fact, arbitrage is possible because traders had bet so much on Lido: deep dive here).
- The price of ETH (and therefore stETH) will increase. It comes down to whether you think the world’s largest blockchain development platform will continue to be of value in the future. (We do.)
The catch is that you can’t trade stETH for ETH yet. You can still buy stETH and sell it back for stETH, of course, but the “bridge” between the two assets won’t happen until after the merger.
How to buy stETH:
- Download and install MetaMask.
- Buy ETH and transfer it to your MetaMask wallet.
- Use Curve to exchange ETH for stETH (note: pay attention to the costs).
The GBTC/BTC Arbitrage Game
You can make a similar investment strategy by buy the Grayscale Bitcoin Trust (GBTC)which is like buying bitcoin (BTC) at a big discount (today about 30%). But as in the previous example, there is a catch.
In a perfect world, you could buy GBTC and trade it 1:1 for BTC. However, the United States has yet to approve a Cash ETFswhich would allow GBTC holders to redeem the underlying BTC.
As with stETH and ETH, the opportunity is to buy GBTC now, betting that you can exchange it for the appropriate BTC in the future. (Remember that you can always sell your GBTC back for GBTC at the current market price.)
There is more uncertainty here than the stETH/ETH example, which is perhaps why it is trading at such a discount. By buying GBTC, you are betting:
- The SEC will approve Bitcoin spot ETFs. Time and time again, the SEC has rejected these requests, arguing that bitcoin does not provide enough protection for investors. But pressure is mounting for the SEC to approve such an ETF (even the WSJ calls him).
- SEC to approve Grayscale cash ETF. Again, if these ETFs are approved – as they have in Europe and elsewhere – it seems likely that Grayscale, with its long history in this market, would be among those approved. But that’s the SEC: anything can happen. (Note that Grayscale also charges a 2% annual fee, which will reduce profits.)
- Bitcoin price will rise. You also have to believe that the price of the world’s number 1 digital asset will continue to rise. Given that it is trading at around a third of its value compared to last year, this also seems likely. But this is crypto: anything can happen.
How to buy GBTC:
- GBTC is available through any online broker (Fidelity, TD Ameritrade, E*TRADE, etc.).
- Remember that 1000 GBTC shares = 1 BTC (i.e. multiply GBTC x 1000 to get your discounted BTC price).
- Wait and watch.
Opportunities are everywhere
Investor mindset means thinking differently from the crowd. Today, the crowd is extremely bearish on crypto, opening the door to opportunities for optimistic investors.
What I like about these two opportunities is they turn market disadvantages into advantages. stETH is offered at a reduced price, thanks in part to the crypto crash. GBTC is offered at a reduced price, thanks to the lack of regulatory approval.
An investment in these is a vote of confidence in the future of crypto: that things will be better.
But remember, it’s even easier to buy and hold BTC and ETH directly, preferably using a regular drip monthly investment. You won’t get the discount, but as the future unfolds, you’ll still see the benefits.
Thanks to Liam Kelly DeFi decryption column for today’s investing inspiration.