TLDR: Lido’s Staked Ether (stETH) is currently trading at a 3% discount to Ether (ETH). And the Grayscale Bitcoin Trust (GBTC) is trading Bitcoin (BTC) at a 30% discount. You can buy these now and bet you can redeem them later at full price.
Sam Bankman-Fried, the unruly-haired young billionaire, made much of his crypto fortune trading the “kimchi bounty.”
SBF noted that bitcoin prices were slightly higher on South Korean exchanges than elsewhere. A savvy trader could buy Bitcoin in the US, sell it on a South Korean exchange, pocket the difference, and repeat until he’s rich.
This strategy, known as arbitrage, finds out where the market is inefficient and values the same asset differently. It usually comes with an additional risk: in the case of the kimchi premium, you had to entrust your money to South Korean exchanges. But when things work out, great fortunes can be made: just ask Sam.
For now Two arbitrage games are available for BTC and ETH investors. Since BTC and ETH are the two assets in our Blockchain Believers portfolio, this is a way to buy them at a “discount”, although that discount comes with additional risk.
I will explain at a high level how these investment strategies work and how to implement them.
The stETH/ETH arbitrage game
Regular readers of our newsletter know about the planned upgrade to Ethereum, also known as The Merge, which will migrate Ethereum from energy-wasting Proof of Work (PoW) to energy-efficient Proof of Stake (PoS). It is a major milestone in the history of cryptography.
The new Ethereum allows you to earn rewards by running a “validator node”, but this requires 32 ETH (about $40,000 at today’s prices) and a lot of technical understanding. Enter Lido, which brings together many smaller investors to run their own nodes and share the rewards.
In other words, you can wager loads of ETH at Lido and get similar wagering rewards to the big players on Ethereum. This has made Lido incredibly popular: around a third of all currently stacked Ethereum runs on Lido.
When you deposit your ETH into Lido, you receive another token called Staked Ether (stETH) in return. When the Ethereum upgrade happens, you should be able to redeem stETH for ETH at a 1:1 ratio.
but Currently, you can buy stETH with a 3% discount on ETH, similar to the kimchi premium. The strategy is to buy stETH, wait for The Merge and then redeem ETH at full price.
stETH to ETH price: the lower it goes, the more opportunities for arbitrage (courtesy of Dune Analytics)
To make this work, make a series of bets:
- The Ethereum upgrade will actually happen. This looks likely (first tests have been successful) and is currently scheduled for September. But the launch date has been pushed back several times, and there’s no guarantee it’ll even happen.
- Lido will still exist. Due to market volatility, Lido could face financial difficulties. However, this seems unlikely as Lido’s business model is different (in fact, the arbitrage is possible because traders had bet so much on Lido: dive in here).
- The price of ETH (and therefore stETH) will increase. That depends on whether you believe that the world’s largest blockchain development platform will continue to have value in the future. (This is what we do.)
The catch is that you cannot redeem stETH for ETH yet. You can always buy stETH and sell back for stETH, of course, but the “bridge” between the two assets is only made after the merger.
How to buy stETH:
- Download and install MetaMask.
- Buy ETH and transfer it to your MetaMask wallet.
- Use Curve to trade ETH for stETH (hint: watch out for the fees).
Price of GBTC to BTC: the lower the better (courtesy Ycharts)
The GBTC/BTC arbitrage game
You can follow a similar investment strategy Purchase of the Grayscale Bitcoin Trust (GBTC), which is like buying Bitcoin (BTC) at a significant discount (about 30% today). But like the previous example, there’s a catch.
In a perfect world, one could buy GBTC and redeem it 1:1 for BTC. However, the US has yet to approve a spot ETF that would allow GBTC holders to redeem against the underlying BTC.
As with stETH and ETH, there is an opportunity to buy GBTC now and bet that you can redeem it for real BTC in the future. (Remember 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. The SEC has repeatedly rejected these applications, arguing that Bitcoin does not have sufficient investor protection. But pressure is building for the SEC to approve such an ETF (even the WSJ is demanding it).
- The SEC will approve Grayscale’s spot ETF. Again, should these ETFs be approved — as they have been in Europe and elsewhere — it seems likely that Grayscale, with its long history in this market, would be among those approved. But it’s the SEC: anything could happen. (Note that Grayscale also charges a 2% annual fee that affects profits.)
- Bitcoin price will increase. You must also believe that the world’s leading digital asset will continue to rise in price. Given that it’s trading at around a third of its value from last year, that also seems likely. But it’s crypto: anything could 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).
- Let’s wait and see.
Opportunities are everywhere
The investor mindset means thinking differently from the crowd. Today, the crowd is extremely pessimistic about crypto, opening the door to opportunities for optimistic investors.
What I love about both of these options is They turn market disadvantages into advantages. stETH is being offered at a discount in part thanks to the crypto meltdown. GBTC is offered at a discount due to the lack of regulatory approval.
Investing in these is a vote of confidence in the future of crypto: that things will get better.
But remember It’s even easier to just buy and hold BTC and ETH directly, preferably with a monthly investment with a steady drip. You won’t get the discount, but as the future brightens, you’ll still see the benefits.
Thanks to Liam Kelly’s Decrypting DeFi column for today’s investment inspiration.
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