GSOL: Fade The Trust, Long Solana

Summary GSOL’s NAV rate premium has once again trended up near 800%. Given the volume data from the March sell-off, the illiquidity of the fund foretells price declines in 2025 even if Solana’s price increases. Shares outstanding have doubled year to date. Lockups for these new private placements will start expiring in Q1-24. When I last covered the Grayscale Solana Trust ( GSOL ) for Seeking Alpha, GSOL traded at an 800% premium to the net asset value of the fund’s shares. This update is not going to be a re-write of that same piece from early-March. Rather, we’ll look at the more updated NAV rate, private placement data, and the fundamental setup for Solana as a blockchain network. First, this excerpt from my March article is probably one of the most important things to understand for those who have not yet seen the prior work: This particular fund is designed for the sole purpose of offering investors exposure to the native asset of the Solana ( SOL-USD ) blockchain, SOL. That’s it. There is no other asset or business underlying GSOL but SOL. Thus, the valuation of the GSOL shares relative to the SOL that each share represents is arguably the most important factor in determining if GSOL shares are a buy or a sell. Since the time that was published, shares of GSOL have battled back to nearly $500 per share once again, after initially collapsing by nearly 70% in the immediate sessions following my post. Data by YCharts There are a couple of things that I find telling about this price action. First, GSOL has underperformed the underlying asset since mid-March. Second, the initial collapse in the price of GSOL is an important cautionary tale about illiquidity. GSOL Daily Chart (TrendSpider) The two sessions following my March GSOL article resulted in 3x and 4x average daily volume – the price of the fund fell by 69% from peak to trough over those two sessions. The lesson here is when there are more motivated sellers than motivated buyers, price discovery will generally result in a rerating lower, as we saw four months ago. Since then, daily volume hasn’t sniffed the highs of those March 11th and March 12th sessions, and the resulting impact has been a grind higher on low volume. But as we’ll explore in a moment, there will come a time when volume spikes again. Current NAV Rate As of article submission, GSOL’s NAV rate is once again grinding up near the 800% premium it traded at in early March. Each fund share is currently backed by 0.374 SOL. At a $162 SOL price, GSOL’s underlying value is $58.23 per share, yet the shares command a market value of roughly $500 as of 7/15/24 close: Data by YCharts What’s interesting to me about GSOL’s NAV rate is the premium is far more similar to what has typically been observed in the very small Grayscale funds. At $74 million in AUM, GSOL is among Grayscale’s top 5 single asset closed end funds by AU, yet the fund trades more like one of the smaller cap Grayscale funds based on the premium rates: AUM Rank Grayscale Fund AUM (millions) Share NAV Market Value Premium 1 Ethereum $9,964 $32.13 $31.97 -0.50% 2 Ethereum Classic $265 $18.99 $12.63 -33.49% 3 Bitcoin Cash $135 $3.34 $11.70 250.30% 4 Litecoin $129 $6.12 $21.09 244.61% 5 Solana $74 $58.23 $499.86 758.42% Source: Grayscale, as of 7/15/24 close At 800%, GSOL’s premium is more similar to the 500% premium of a fund like the Grayscale Decentraland Trust ( MANA ) than that of a fund like the Grayscale Litecoin Fund ( LTCN ) despite having an AUM figure far closer to LTCN. Low Float & Shares Growth In Grayscale’s Q1-24 report for GSOL, the company disclosed a 65% year to date increase in shares outstanding from 633k to 1,048k: Q1-24 Quarterly Report (Grayscale) While only 23,640 of these shares were held by related parties at the end of March, the float of 288k shares implies a quarter over quarter reduction in the float as a percentage of shares outstanding from 31% to 27%. We don’t yet have a quarterly report for Q2-24, but we do know from Grayscale’s website that GSOL currently has 1,272,927 shares outstanding as of July 15th 2024. This means that shares outstanding have actually doubled so far in 2024. The increase in shares outstanding is a product of the Grayscale reopening of private placements earlier this year. According to Grayscale’s private placement tab on the GSOL page, private placements require a 12-month lockup: Following a one-year holding period, Grayscale intends to attempt to have Shares of new products quoted on a secondary market. However there is no guarantee that we will be successful. When these shares come out of lockup, they can be sold at the market rate, even though the placements are made at NAV. Essentially, accredited investors can buy GSOL shares at $58 and wait a year to sell on secondary at a premium. The catch is, the premium can swing wildly and the last investors in via private placement are taking on more duration risk while they wait in line as earlier peers sell out to capture the premium – potentially reducing that premium dramatically if there aren’t enough willing buyers. And I’ll reiterate, if just a 3x spike in average volume over two sessions can whack the secondary price down 69% as it did back in March 2025 will likely lead to a dramatic reduction in the market price of GSOL given the shares outstanding have doubled just halfway through 2023. Longing Solana Is The Better Play The question for accredited investors would be is private placement worth the duration risk? The answer to that likely boils down to whether one is bullish of Solana longer term. As long as the price of SOL doesn’t fall below private placement price, private placers can potentially still get out ahead on their initial investments, provided the fund doesn’t flip to a NAV rate discount as virtually every Grayscale fund did back in 2021. Fundamentally, I still really like the setup for Solana: Solana P/F vs MC (Token Terminal) I’m personally of the view the Solana’s key metrics are actually very good. Despite the price of the coin surging more than 600% from the lows of crypto winter, the valuation of Solana has actually come down considerably. At 122x circulating fees, Solana is trading at a fraction of the valuation that Ethereum has been trading at for the last several months. Stablecoin footprint (Defi Llama) Furthermore, Solana’s stablecoin footprint continues to improve relative to smart contract blockchain peers. Solana once again finds itself in the top 5 for stablecoin market caps at $3.3 billion. While it certainly hasn’t manifested yet to a large degree, growth in stablecoins on low-fee chains like Solana is indicative of a growing ability for merchants and consumers to utilize public blockchains for dollar-based settlement without the need for higher fee processing peers like Stripe or Square. Closing Thoughts I’m admittedly surprised the GSOL premium is still as high as it is here in mid-July. For GSOL holders, I would remain mindful of growth in shares outstanding through the end of the year. The lockup periods for 2024 private placers will begin in the first quarter of 2025. For accredited investors considering a private placement, I would weigh the merits of simply buying Solana and staking for the 7% reward. This way the duration risk of the lockup period is eliminated, there is no risk of selling your shares below NAV on secondary, and you’re not paying Grayscale’s 2.5% management fee while the SOL sits dormant for 12 months.

Source: Seeking Alpha