Grayscale Bitcoin Trust (GBTC) has consistently held the title of being the world’s largest Bitcoin fund, boasting an impressive $26.8 billion in assets. As a closed-end fund, GBTC solely holds Bitcoin and often trades at a market price that can deviate from its underlying net asset value (NAV) based on the coins it possesses.
In recent years, investing in GBTC has been a dual bet on both the price of Bitcoin and the potential for GBTC’s price to narrow the significant discount to its NAV. This investment strategy has proven to be immensely successful. While Bitcoin has surged by 164% this year, reaching approximately $44,000, GBTC has outperformed with a remarkable 327% gain. Notably, the shares concluded at $35.51 on Friday.
The predominant reason behind GBTC’s exceptional performance lies in its drastically reduced discount to the fund’s NAV. Previously, during the crypto crash last year, this discount hovered around 50%. However, it has now diminished to a mere 11%.
The prospect of Grayscale successfully transforming the trust into an exchange-traded fund (ETF) holds immense promise for investors. Such a conversion would effectively eliminate the NAV discount since ETFs trade differently, with market-makers ensuring price and NAV alignment.
Unfortunately, the Securities and Exchange Commission (SEC) has emerged as a substantial hurdle in this endeavor. The SEC, which has yet to approve any Bitcoin ETFs, is now under considerable pressure to grant approval following a recent court ruling against them on the matter.
While GBTC may not be the first to receive approval, there exists a deadline of January 10, 2024, for ARK Investment Management’s ETF application approval or denial. GBTC could potentially gain approval before or after this date.
Investors must carefully weigh the evolving dynamics surrounding GBTC and the potential for regulatory changes that could impact its performance in the future.
The Road to Bitcoin ETF Approval
The Securities and Exchange Commission (SEC) has been in frequent discussions with executives from Grayscale, BlackRock, and Invesco, among other potential issuers, to iron out the details of how Bitcoin exchange-traded funds (ETFs) would operate. However, there are potential obstacles on the path to approval. One such hurdle could involve the SEC requesting ETF sponsors to withdraw their applications and refile them. Compliance with these requests could be seen as a means to maintain a positive relationship with the regulatory body. Yet, any delays in the approval process may not sit well with Bitcoin traders or those invested in Grayscale’s Bitcoin Trust (GBTC).
Another scenario involves the SEC avoiding the appearance of favoritism by allowing multiple ETFs to launch simultaneously. Grayscale has a strong case for being among the first batch of approved ETFs due to its longstanding efforts to convert GBTC.
Despite attempts to seek comment, the SEC has yet to respond. Grayscale, on the other hand, expressed its ongoing commitment to constructive engagement with the SEC regarding the uplisting of GBTC to NYSE Arca.
Certain hedge funds have taken positions in GBTC while shorting Bitcoin, aiming to profit from the arbitrage opportunity without exposing themselves to Bitcoin’s inherent risks. James Elbaor, founder of Marlton LLC, which manages a hedge fund focused on closed-end funds, is critical of Grayscale but believes they will eventually succeed in converting GBTC. Elbaor himself hedges his Bitcoin exposure using futures.
While such strategies may not be easily accessible to retail investors, they play a crucial role in the market dynamics surrounding a potential spot Bitcoin ETF approval. If the approval is already anticipated and priced into Bitcoin, it could trigger a sell-off once the SEC gives the official green light. Conversely, any delay in ETF approval could lead to investor panic and subsequent selling, ultimately driving up the discount.
While GBTC is well on its way to becoming an ETF, there is little incentive for investors to hold onto their positions until the end of the regulatory race. Those who have weathered the ups and downs of GBTC have already reaped the rewards.