Grayscale Litecoin Trust: Implying A $438 LTC Price (OTCMKTS:LTCN)

Litecoin (LTC-USD) is one of the many Bitcoin (BTC-USD) forks in the cryptocurrency market. As an earlier fork, LTC is one of the oldest coins in the market and is not generally viewed as one of the more exciting opportunities in the digital asset space. Despite that, Litecoin has maintained a robust user base compared to most of the older proof-of-work coins as the network has generally averaged over a quarter of a million daily active users for the last two years.

I’ve written about the network a handful of times for Seeking Alpha through the years. You can certainly consider me a proponent of Litecoin as it remains sort of the crypto of choice for peer-to-peer payments at times of high fees in Bitcoin and Ethereum (ETH-USD). By certain measures, LTC is arguably one of the more interesting coins in the market. Given the lack of hype in the coin, I have historically viewed LTC as a contrarian pick among typical crypto investors.

If you like valuation metrics, LTC’s 30 day average Net Value to Transactions Ratio (NVT ratio) is currently 54. This ratio divides the market capitalization of each coin by the dollar-denominated value transferred over the network. Compared to other proof-of-work blockchain networks like Bitcoin, Bitcoin Cash (BCH-USD), and Dogecoin (DOGE-USD), Litecoin can realistically be viewed as “cheap.” What likely can’t be viewed as “cheap” is the Grayscale Litecoin Trust (OTCQX:LTCN).

Grayscale Litecoin Trust

When I last covered LTCN, I said investors should be careful chasing the fund as it was trading at a premium to Net Asset Value, or NAV. At that time, the premium to NAV that I found to be problematic was just 7%. This is child’s play compared to where speculators have since taken LTCN:

Click to enlarge

Source: Grayscale, Author’s calculations

As of market close on April 2nd, 2024, LTCN commands a 407.6% premium to NAV. Since the sole purpose of the fund is to offer investors exposure to Litecoin and nothing more, buying LTCN for $46.85 when the LTC value of each share is $9.23 is fundamentally no different than paying $407 for a $100 gift card. This might make sense if one expects to be able to sell that $100 gift card for $500 or even $600 shortly after, but this is more reflective of mania behavior rather than anything fundamentally driven.

As I see it, one of the major problems driving this action is the fact that LTCN has a history of trading at what I view to be preposterous premiums to NAV. During the height of the previous LTCN mania in late 2020, the fund shares briefly traded at almost a 6,000% premium to NAV. Judging from some of the comments in my other crypto-proxy articles from March, I suspect today’s LTCN buyers are expecting the fund’s premiums to reach those wild levels again simply because it has happened before. Given Grayscale’s reopening of private placements, I have my doubts that premiums can hit those 2020 high levels again.

Private Place Opportunity?

During crypto-winter, investors wanted out of crypto-proxies and Grayscale’s products were notoriously bludgeoned. At the depths of the bear market in late 2022, LTCN traded at a 65% discount to NAV. In late December 2022, arb traders could buy $6 of LTC for $2 via LTCN shares. Since all but one of Grayscale’s single-asset crypto products are closed-end funds rather than spot ETFs, investors couldn’t buy shares of LTCN under NAV and redeem the shares for the underlying assets to pocket the spread.

If such an opportunity were available to investors, it is unlikely the discount in LTCN would have ever reached such depressed levels as it did in 2022. Fortunately, when premiums in Grayscale’s single asset funds get out of hand – as they are currently – the company can open up private placements to address the market inefficiency and that is exactly what is happening now:

After roughly two and half years of Grayscale’s Litecoin holdings going down due to the fund’s 2.5% management fee, LTC is once again coming back into the Grayscale Litecoin Trust through share issuance via private placement:

Click to enlarge

Source: Grayscale

Since the start of the year, LTCN’s outstanding share total has increased by just over 6%. This is not yet indicative of a significant push from accredited investors to try to capture the premium spread. That means there could be an opportunity to play the arb from the other side as any private placements today would likely be among the first shares out when lockup expires. So if you believe the LTCN premium can hold up (or even grow) over the next 12 months, a smart way to play that thesis may be taking the private placement at NAV and selling the shares on secondary after lockup to pocket the spread.

But again, past performance is not an indication of future returns. There is absolutely no guarantee that LTCN’s premium will hit the levels it hit during the 2020 bull run. As the shares outstanding have increased, it appears as though related parties to Grayscale may be selling shares in the fund. Per the latest 10-Q for LTCN, related party ownership fell about 15% from over 1.1 million shares at the end of June 2023 to roughly 956k shares at the end of December.

Investment Risks

Even if there was no premium and the fund traded more closely with the NAV, LTCN isn’t a competitive investment product at this point in time. Litecoin can easily be purchased directly in crypto-specific IRA products that are offered by companies like iTrustCapital without such a high annual fee. Furthermore, LTC that is stored in the fund is held in custody rather than being put to work through yield-producing protocols like THORChain (RUNE-USD). At current THORFi Savers rates, paying 2.5% to keep LTC with Grayscale rather than earning 5.8% via THORFi presents a more than 8% opportunity cost that compounds annually.

Summary

At a $46.85 share price, LTCN is implying a $438 Litecoin price. I’d love a $438 LTC price as much as the next Litecoin bull, but LTCN’s premium simply has no fundamental justification. This fund traded at an even larger premium about 3 years ago. That doesn’t mean we’ll see those NAV rate levels return this time around. That said, the smart money can probably play this from both sides. The only question is whether or not the premium can outlast the lockup. I wouldn’t bet the mortgage on it.

Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.