Grayscale Litecoin Trust Turns Odd Again (LTCN)

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I’ve written quite a few articles (I, II, III) on how the Grayscale Litecoin Trust (OTCQX:LTCN) was one of the craziest things happening in the market, even on a market where madness wasn’t hard to find.

The craziness, at the time, manifested itself through massive premiums over what the trust actually held: Litecoin (LTC-USD).

Of course, since then the craziness all faded as more and more shares unlocked. However, recently, LTCN has turned odd again, only not really like before. This time, LTCN is doing the opposite.

Remember, to know how much each LTCN share is worth is rather simple. You just take how much Litecoin the trust holds per share (0.09073168) and multiply that by the current Litecoin price ($141.87).

As of right now, that would imply an intrinsic value, for LTCN, of $12.87. But of course, as of this writing, LTCN trades, instead, for $7.07.

Each LTCN thus currently trades at a 45% discount to its intrinsic value. A huge turnaround from when this trust used to trade for hundreds percent of premium. A 45% discount more or less means you can buy Litecoin today at the equivalent of $77.90. If you like Litecoin at $141.87, you’ll certainly love it at $77.90.

So, Is LTCN A Buy?

Here, things are more complicated. LTCN is certainly a buy if you have an itch to buy Litecoin. Or crypto in general (because most cryptos tend to move as a block). If that’s your intention, then surely, LTCN is a much better way to buy Litecoin than buying Litecoin directly.

However, if at the same time if you think crypto is one of the greatest bubbles in history, then even a 45% discount might not save you from the reckoning. The totality of cryptos trades for around $2.05 trillion in market capitalization. If this is a gigantic bubble, it can easily have 80-90% downside from here. In that event, a 45% discount wouldn’t save you.

Finally, there’s another consideration to make. At a huge 45% discount, Grayscale could theoretically make money out of nothing and narrow the discount for its customers, too. It would just have to buy LTCN in the market, redeem the shares for Litecoin, and sell Litecoin.

Or Grayscale could just be nice to its customers, and open redemptions to everyone. In that case, the market itself would quickly eliminate most of the discount, by following the process I described for Grayscale.

There might however be two obstacles to the above:

  • First, self-interest. If Grayscale opens LTCN redemptions, its assets under management would drop as units would be redeemed (this could however be compensated by higher per-unit values).
  • Second, regulatory barriers. It’s entirely possible that Grayscale isn’t able to open LTCN redemptions because of a regulatory impediment to doing so.

Conclusion

There are three main conclusions to draw here:

  • First, this time LTCN trades at a huge discount. This is interesting all by itself and can lead to many different speculative hypotheses.
  • Second, for someone wanting to buy crypto or Litecoin in particular, it’s better to buy LTCN than to buy Litecoin directly in the market.
  • Third, speculators might want to buy LTCN on the hopes that Grayscale will do something to reduce the huge discount.

What about me? Well, I fall into the “crypto is a huge bubble” camp. Hence, even a 45% discount on a huge bubble is not enough to entice me to be personally positive on LTCN. I see the potential downside as exceeding 45% by a large margin. Plus, Litecoin can drop and Grayscale might do nothing to reduce the discount, so the discount would be of little consolation then.

Still, I acknowledge that for those interested in crypto, a 45% discount must be too large to pass.


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