GDLC: Achievement Unlocked (Again)

Summary GDLC has appreciated over 100% since my last 'buy' call in September, but the NAV discount has significantly narrowed from 39% to 17%. The fund's high 2.5% expense ratio and lack of staking for certain assets present long-term investment concerns despite recent gains. My 'fair value' framework now shows a 10% adjusted discount, making the trade less compelling than before, though still viable. Downgrading GDLC to 'hold' due to reduced NAV discount and high market greed sentiment, but will reassess when conditions improve. It has been slightly over two months since I last wrote about the Grayscale Digital Large Cap Fund ( GDLC ) for Seeking Alpha. In September, I called GDLC "crypto's deep value play" and reiterated a 'buy' call. It is up over 100% since my last piece. GDLC: Where's The Diversification? (August 2022) Grayscale Digital Large Cap: A Potential Arbitrage Opportunity (June 2023) Grayscale Digital Large Cap Fund: Achievement Unlocked (December 2023) GDLC: Too Cheap To Ignore Again (March 2024) GDLC: Crypto's Deep Value Play (September 2024) This is a fund that I've covered for Seeking Alpha a half dozen times over the last two years: Seeking Alpha My main critique of the Grayscale Digital Large Cap fund has been what I view to be a poor fundamental methodology. To a larger degree than natural product competitor Bitwise 10 Crypto Index Fund ( OTC:BITW ), GDLC has a significant weighting to top coins Bitcoin ( BTC-USD ) and Ethereum ( ETH-USD ). While I've viewed this as a fundamental weakness of the fund as an investment product, my opinion as a swing trader has been bullish. In this brief update, we'll again look at my 'fair value' framework and assess whether or not now is a good time to take the win in GDLC. Fund Details Inception: 2/01/2018 Expense Ratio: 2.5% AUM: $750 million I still believe the 2.5% expense ratio is far too high for what this fund actually does. Especially when considering the opportunity cost of not staking the proof-of-stake assets in the fund. When GDLC was launched, each share represented exposure to ten different digital assets. Today, we see just five, and those five assets haven't changed in the two months since my last piece. After BTC and ETH, GDLC gives investors exposure to Solana ( SOL-USD ), Ripple ( XRP-USD ), and Avalanche ( AVAX-USD ). The chain-native staking rates observable today are shown below: Asset Reward Rate Staking Ratio ETH 3.19% 28.18% SOL 6.41% 65.73% AVAX 7.82% 52.83% Source: Staking Rewards, as of 11/26/24 What's important to understand is not staking AVAX, SOL, and to a lesser degree ETH has an opportunity cost because those assets should be earning yield if they're not going to be used for purchasing other assets on chain or paying gas for DEX swaps. This is a large reason why GDLC may not be a great way to invest in crypto long term. Of course, there is a US regulatory story at play here regarding asset staking, and we'll see if that changes in the future with a new administration in January. 'Fair Value' Framework Of the five assets in the fund, the only one that I personally have zero direct exposure to is XRP. For the purpose of diversified exposure to crypto, I think you can do worse than GDLC, but I still think BITW is a better option at this point due to the fact that BITW shares provide exposure to ten assets rather than just five. Back in September, I reiterated GDLC as a 'buy' again because the fund was trading at a 39% discount to net asset value, or NAV. Today, we find the fund trading at just a 17% discount to NAV. Thus, this has been a very successful trade; especially when considering the appreciation in the assets themselves. For those who have not seen the prior work, my 'fair value' calculation zeroes out the altcoins after BTC and ETH and assigns a full valuation to the BTC and ETH in the fund. The reason I'm not willing to write down either of those assets is because Grayscale has not one, but two ETFs for both Bitcoin and Ethereum that trade at NAV. Thus, I view it as an inefficiency in the market that GDLC can trade at a discount to the BTC and ETH held by the fund: Asset Asset price Holdings/Share $ Val/Share Adjusted Val % of Fund BTC $93,027 0.00037288 $34.69 $34.69 75.5% ETH $3,305 0.00227141 $7.51 $7.51 16.3% SOL $228.6 0.00884517 $2.02 $0.00 4.4% XRP $1.35 1.06633127 $1.44 $0.00 3.1% AVAX $41.36 0.00766179 $0.32 $0.00 0.7% Share Value $45.97 $42.20 Source: Grayscale, CryptoPrices.cc, Author's calculations and adjustments as of 11/26/24 intraday Applying my standard adjustment to GDLC assets produces an adjusted 'fair value' price of $42.20. At a $38 market price, we get an adjusted discount rate of 10%. Given this, I very much believe there is still meat on the bone with this swing trade. However, there are additional considerations to keep in mind. Risks and other Considerations First of all, my view of 'fair value' may not be the same as the market's or that of any individual readers. Frankly, there is no real standard within the digital asset industry for assessing valuations. Furthermore, Bitcoin and Ethereum are very different types of networks and each investor may find valuing them at market price to be too generous. When I last covered GDLC, the 39% discount to NAV was compelling because it discounted even the Bitcoin in the fund if we wrote down the ETH to zero as we do with the SOL, XRP, and AVAX. We don't have that setup anymore, with a $38 share price and $34.69 BTC value per share. Alternative.me Something that I think investors should definitely be mindful of is the greedy sentiment in this market. The Crypto Fear and Greed Index printed a 94 on November 22nd. This took out the 2024 high of 90 on March 5th. BTC's March 14th high didn't get taken out until November 6th and the coin has gone up nearly in a straight line since. I would not rule out a deeper mini correction in Bitcoin before the end of the year. Finally, as discounted as GDLC was in September, related parties did not buy any GDLC shares during Q3-24. For quarter-ended September, related parties still owned 1,055,487 shares. We've generally seen related party holdings decline over the last few quarters. Investor Takeaways I'm still long GDLC, though I do hold less than I did in September. I see two primary reasons to hold the fund as a trade despite my fundamental issues with the product itself; NAV discount rate and broad crypto bullishness. Each of these reasons are less compelling than they were just 2 months. The Crypto Fear and Greed Index printed its highest figure in several years at 94 and the official discount rate has been more than chopped in half since mid-September. Even my adjusted discount is less compelling than it was previously, at just 10%. Again, I do still have some GDLC, but I'm downgrading the fund to a 'hold' and will surely revisit it again for Seeking Alpha when the setup merits.