Grayscale Trust Becomes ‘Betting Line’ for Spot Bitcoin ETF

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(Bloomberg) — Traders betting that regulators will approve a US spot Bitcoin exchange-traded fund sooner rather than later have all but evaporated a once-gargantuan discount on the world’s biggest crypto fund.

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The $24 billion Grayscale Bitcoin Trust (ticker GBTC) is currently trading at a roughly 8% discount to its underlying Bitcoin holdings, the narrowest dislocation in over two years, data compiled by Bloomberg show. GBTC entered 2023 with a record discount of nearly 50%.

To many market observers, the quickly narrowing discount reflects building optimism that the US Securities and Exchange Commission is poised to allow physically-backed Bitcoin ETFs to launch after years of denials. A wave of applications from asset-management titans including BlackRock Inc. combined with the SEC’s loss in court against Grayscale over the agency’s decision to block the bid to convert GBTC into an ETF have investors betting that this time is different.

“It’s reasonable to view GBTC’s discount as essentially a live betting line on spot Bitcoin ETF approval,” said Nate Geraci, president of The ETF Store, an advisory firm. “The remaining discount indicates this isn’t a done deal yet, but there’s clearly optimism in the air.”

GBTC has traded at a persistent discount to its holdings since early 2021 given that the trust’s structure doesn’t allow for redemptions, essentially turning the product into a closed-end fund. However, growing conviction that GBTC will be able to convert into a spot Bitcoin ETF has fueled the product’s nearly 277% surge in 2023, far outpacing Bitcoin’s 128% increase and narrowing the discount in the process.

Speculation that GBTC will be able to convert into an ETF following the SEC’s blessing has sent billions of dollars flooding into the Grayscale trust this year. However, it’s likely that those funds will quickly exit after the fact, according to JPMorgan Chase & Co.

“Assuming this buying flow was mostly speculative in anticipation of GBTC being converted to an ETF, then it is likely that this $2.7b would come out of GBTC as these investors take profit once GBTC gets converted,” JPMorgan analysts led by Nikolaos Panigirtzoglou wrote.

Additionally, outflows could total much more than $2.7 billion should Grayscale not lower its fee following a potential conversion, JPMorgan said. GBTC charges 2% annually, while Cathie Wood’s ARK Investment Management and digital-asset firm 21Shares recently listed a 0.8% fee on their spot-Bitcoin ETF application.

In an emailed comment, a spokesperson for Grayscale said they believed GBTC’s assets under management “will likely grow after receiving approvals to trade as an ETF.”

Regardless, those who bought into GBTC at the height of its discount distress have minted profits as the dislocation has dissolved. While the move so far this year has been dramatic, it’s unlikely that GBTC will return to trading at a premium to its holdings until ETF approval is a done deal, according to Bloomberg Intelligence.

“I don’t expect GBTC to head back into a premium before a conversion — though its technically possible,” Bloomberg Intelligence ETF analyst James Seyffart said. “We believe that there’s a 90% probability of SEC Bitcoin ETF approval by January 10th but it’s not guaranteed just yet.”

(In ninth paragraph, added comment from Grayscale received after publication)

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