The world’s largest Bitcoin fund is selling off faster than the cryptocurrency itself as investors rush to the exits.

The US$31.6 billion Grayscale Bitcoin Trust (ticker GBTC) plunged 21 per cent this week, outpacing a 18 per cent decline in the world’s largest cryptocurrency. That’s evaporated GBTC’s once-massive premium to the Bitcoin it holds, with the price of GBTC closing 3.8 per cent below the value of its underlying holdings on Thursday -- a record discount, according to data compiled by Bloomberg.

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It’s an unusual situation for GBTC, which has persistently traded at a premium to its net asset value since the fund’s launch in 2013. That figure soared to 40 per cent in late 2020, with investors willing to pay a markup for exposure to Bitcoin‘s dizzying rally. That avalanche of inflows swelled the number of GBTC shares outstanding to a record 692 million. However, GBTC doesn’t allow redemptions -- meaning that shares can only be created, but not destroyed. With Bitcoin’s climb now stalling, that’s created a supply and demand imbalance as participants in the trust seek to find buyers in the secondary market.

“It’s more indicative of the fact that there are so many shares are available, and it indicates demand for Bitcoin at these prices is falling off,” said Bloomberg Intelligence analyst James Seyffart.

Bitcoin surged to a record of over US$58,000 last weekend, but has stumbled since. The cryptocurrency fell another 4 per cent on Friday, on track for its worst weekly pullback in a year. The wider Bloomberg Galaxy Crypto Index, tracking Bitcoin, Ether and three other cryptocurrencies, is down 23 per cent this week.

Bitcoin’s lurch lower is part of a broader risk asset stumble, as spiking Treasury yields rattle the market’s more speculative fringes. High-flying tech stocks have been hammered as investors reassess loft valuations, with the Nasdaq 100 on track for its worst week since March.

Among those hit the hardest is Cathie Wood’s lineup of Ark Investment Management ETFs. The flagship ARK Innovation ETF is on track for a fifth consecutive day of declines, and is poised to erase its year-to-date gains after a nearly 150 per cent surge in 2020. Ark Investment is the fourth-largest holder in GBTC.

Michael Sonnenshein, chief executive officer of Grayscale Investments, acknowledged the risk of GBTC’s premium disappearing while speaking in a panel for the Bloomberg Crypto Summit on Thursday.

“It’s certainly a risk, no question about it, but ultimately price discovery in GBTC every day is driven entirely by market forces,” Sonnenshein said.

A host of new entrants could also be challenging GBTC’s command of the competitive landscape. The Bitwise 10 Crypto Index Fund, the Osprey Bitcoin Trust and the SkyBridge Bitcoin Fund LP have all launched within the past three months. Meanwhile, two Bitcoin ETFs -- a structure yet to be approved by U.S. regulators -- began trading this month in Canada.

“Since the beginning of the year, we’ve seen the launch of multiple competing products,” said Nate Geraci, president of the ETF Store, an advisory firm. “The unpleasant truth for GBTC investors is that competition erodes demand for the product, which can lead to a collapsing premium or even a discount.”

--With assistance from Claire Ballentine.