EIP-1559--the Ethereum protocol proposal to burn supply and turn ETH into ultrasound money--has underpinned one of the most powerful ETH price moves since 2017 on the march from $1,400 to $4,200. An alternative version of this narrative may now be coming to Litecoin on the demand side. Litecoin faces a potential demand surge of ~2.5% of its market cap (~$270mm) over the next twelve months. The driver? Grayscale Litecoin Trust repurchases.
The Grayscale Litecoin Trust (ticker “LTCN”) began trading in August 2020 at a premium-to-spot north of 1,000%. This drove arbitrageurs to borrow LTC from lenders (Genesis, BlockFi, Galaxy, Celsius, etc.), use those coins to subscribe for the trust, and then wait 12 months for the newly-issued shares to season. As those shares begin to season over the coming months, these same arbitrageurs will sell their LTCN shares and repurchase LTC coins with the proceeds to repay their loans, collapse the premium spread, and hopefully turn a profit higher than their cost-of-capital.
Although Grayscale repurchases have long been part of broader market flows for BTC and ETH, this Litecoin repurchase period may be particularly interesting due to a confluence of bullish factors for spot:
The subscriptions were done in H2 2020, at a time when the Grayscale premium arbitrage trade was performing particularly well, and thus sized aggressively
Unlike the Grayscale Bitcoin Trust (ticker: “GBTC”) and even the Grayscale Ethereum Trust (ticker: “ETHE”), the majority of LTCN subscribers were possibly arbitrage-driven with few long-only investors, meaning most could buy LTC back rather than holding LTCN shares
The spot price of LTC has gone up almost 2x from the average subscription price of ~$90 per LTC, creating at least ~2x the buy pressure from the unwind of the trade
LTC is well below both its 2017 and 2021 high-water marks, and barely broke its 2017 all-time high in 2021 (by $14), even though it experienced a halving in 2019
Although not directly related, LTC is often merge-mined with DOGE, which has experienced an uptick in buying interest
Coincidentally, the LTC repurchases are scheduled to begin around the same time as ETH’s EIP-1559, with the first significant batch in July, August, September, followed by the largest batch in December.
Source: Grayscale, BlockFi
Given the amount of forced buying pressure relative to market cap (~2.3%) this demand may cancel out up to 7 months of LTC mining emissions starting in July of this year. And the more the price of LTC goes up between now and the first repurchases in July, the larger the amount of the repurchases could become.
Is Litecoin about to experience what it’s like to have a year without mining?
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