Why Grayscale's Solana Trust Is Trading at a 10x Premium

The price of bitcoin is up an impressive 27% over the past month, due in part to rising expectations of the launch of a spot bitcoin exchange-traded fund in the U.S. 

But that’s nothing compared to the rally in another popular cryptocurrency. 

SOL, the native cryptocurrency of the Solana blockchain, has nearly tripled over the past month. With a market cap of $26 billion, SOL is a minnow compared to bitcoin, but not insignificant. It’s the sixth-most-valuable cryptocurrency by market value overall, and the second-most among cryptocurrencies associated with smart-contract platforms.  

Solana competes with Ethereum, which uses ether (with a market value of $240 billion) as its native currency. However, concerns about the “scalability” of the Ethereum blockchain, which prioritizes decentralization, have given rise to competitors like Solana, which prioritize speed and cost efficiency. 

Solana was closely associated with Sam Bankman-Fried, the founder of FTX, and the price of SOL crashed after the crypto exchange imploded last year. From a high of over $250 in Nov. 2021, SOL tumbled to less than $10 by Dec. 2022.  

The Grayscale Solana Trust (GSOL) Premium

As the crypto markets have turned around this year, SOL has been one of the biggest beneficiaries. Today, the cryptocurrency trades at more than $60, and investors can’t get enough of it. Most of the SOL that’s being purchased is taking place through crypto-dedicated exchanges, like Coinbase. Investors who want to buy the token through more conventional channels have limited options.  

One of those options is the Grayscale Solana Trust (GSOL), which became available to trade on the OTC Markets back in April. Like the hugely popular Grayscale Bitcoin Trust (GBTC), which has $23 billion in assets under management, GSOL can be bought and sold in a traditional brokerage account.  

But just like GBTC, GSOL isn’t an ETF, so there’s no way to arbitrage away price difference between the trust’s net asset value and its market price in real time. For GBTC, that’s resulted in a wide discount that’s only narrowed recently on hopes that the trust could soon convert into an ETF. 

For GSOL, it’s resulted in the opposite—a massive premium that reached as high as 869% last week (in other words, investors in GSOL were buying SOL for almost 10x its market price.) 

GSOL Premium Is Nothing New  

As crazy as it sounds, we've seen this seen before. Similar-sized premiums in the Grayscale Ethereum Trust (ETHE) opened up when it first began trading in 2019 and 2020, and even GBTC held premiums of more than 100% for many years. 

Those premiums eventually disappeared as newly created shares pushed the price of the trusts down towards—and eventually, below—their net asset values. 
 
Grayscale originally sold shares of its trusts in private transactions to accredited investors. Those private placements came with a one-year lock-up period. The long lock-up period meant that the private sales weren’t as effective as the creation mechanism that’s used to arbitrage away premiums in ETFs, but they eventually got the job done in erasing the premiums on GBTC and ETHE. 

However, Grayscale said that regulations precluded it from offering redemptions, which meant that once GBTC and ETHE eventually began trading at discounts to their NAVs, there was little the firm could do to reverse the trend. 

In 2021 and 2022, as the growth bubble popped and investors wanted nothing to do with crypto, the discounts on GBTC and ETHE got wider and wider, eventually reaching between 50 to 60%. 

Today, they’re a much narrower 10 to 20% as investors bet that the two trusts could be converted into ETFs imminently.  

Will the GSOL Premium Follow Other Trusts? 

That brings us back to GSOL, a trust that seems to be following the same pattern as its predecessors. There is one key difference, though. 

According to Grayscale’s website, private placements on GSOL aren’t currently available. That means that, at least for now, there won’t be any newly-created shares to help bring the trust’s price back down towards its NAV. 

That means the trust’s premium could persist indefinitely, as long as investors are willing to pay eye-watering premiums for the convenience that it offers. But make no mistake, GSOL is much riskier than the underlying cryptocurrency that it holds. If Grayscale were to reopen private placements for the trust, that could put immense pressure on its price. 

A conversion of GSOL into an ETF would do the same, but even faster. 

There’s nothing to suggest that either of these things are going to happen imminently; a spot SOL ETF seems particularly far-fetched at the moment. However, given how quickly the crypto ETF landscape has shifted over the past few months, it certainly can’t be ruled out.