I wanted to talk about the Grayscale Digital Large Cap Fund (GDLC) today. Now, back in August 2022, I wasn’t really impressed with this fund. It had a poor diversification strategy, with just 5 assets under management and a heavy focus on Bitcoin (BTC) and Ethereum (ETH). These two cryptocurrencies already have their own Grayscale funds and attract most of the investment flow in the crypto market.

Unfortunately, not much has changed since then. GDLC is still poorly diversified, and I still believe that the Bitwise 10 Crypto Index Fund (BITW) is a better option for those looking for exposure to multiple crypto assets in one place. However, here’s the twist: the performance of GDLC has been so bad lately that it might actually present a good buying opportunity now.

Let’s talk about the discounts. Grayscale Bitcoin Trust (GBTC) is the most well-known fund managed by Grayscale, and it has been trading at a significant discount to its net asset value (NAV) for quite some time now. The same goes for almost all of Grayscale’s other crypto investment funds, including the Grayscale Ethereum Trust (ETHE), which is currently trading at a nearly 45% discount.

Recently, there has been some positive news regarding the possibility of a spot Bitcoin ETF, which has helped to narrow the discount on GBTC. This renewed interest in spot BTC ETFs could also be a positive sign for GDLC.

Now, let’s talk about the arbitrage trade potential with GDLC shares. As I mentioned earlier, the fund is heavily weighted towards BTC and ETH, which together make up over 97% of the fund’s assets. The shares are currently trading at a 50% discount to NAV, which presents an interesting opportunity.

If we adjust the discount rates in line with GBTC and ETHE, the GDLC shares should be priced around $8.55. This is based on assuming a BTC price of $30,000 and an ETH price of $1,850, while completely discounting the smaller altcoins in the fund.

Of course, investing in crypto comes with its risks. The Grayscale funds can be volatile, and even if the discount closes, it doesn’t guarantee that the share price will appreciate. It’s also worth noting that GDLC has a relatively high concentration of related party ownership, which could add to the risk.

I see GDLC as a potential arbitrage trade opportunity due to its underperformance and the significant discount on its shares compared to other Grayscale funds holding the same assets. However, it’s important to consider the risks involved and monitor the discounts of other Grayscale funds. I personally view GDLC as a small speculative trade at this point.