A Bitcoin ETF is on sale, but it is not good

by James · July 13, 2022

In the case of the Grayscales Bitcoin Trust of $ 12 billion, what is it on sale is not necessarily an agreement.

Shares in the largest bitcoin investment company in the world are traded at one discount to the underlying assets (bitcoin) that they represent.

That discount has expanded to as much as 35% recently, to the annoyance of some investors who paid a higher price for shares (or a premium) than the bitcoin they represented.
Why? “Simply put, there are more stocks on the market than people want to buy that have created this perpetual discount,” Bobby Blue, an analyst at research firm Morningstar, told Axios.

Why it matters: There is no way to get bitcoin out of the Grayscale Bitcoin Trust also known under the ticker symbol “GBTC.”

Recall cryptocurrency lender BlockFi said on Tuesday that it wound up its entire position in GBTC and would not take shares as collateral, until they returned to the statement hours later.

How it works: It’s because GBTC is not an ETF (it wants to be). And the trust structure makes them inflexible for ever-changing supply and demand.

So when GBTC was just bitcoin games in the city, market demand exceeded supply, shares in GBTC were traded at a premium or for more than the underlying bitcoin it represents.
This was the case for much of 2015 to 2019.
And as supply exceeded demand (around the time other bitcoin ETFs became available), shares of GBTC turned trading at An offer.

There are three factors which drives this gap between price and the underlying net asset value, according to Blue.

Other ways to trade bitcoin have spread.
Fees — GBTC charges 2% annually.
And also, “Grayscale may have misplaced and over-issued stocks to the market,” according to Blue.

See also What is a Bitcoin ATM?

The other side: A spot bitcoin ETF approval would allow Grayscale to convert its trust into an ETF, closing the gap between the price and the underlying bitcoin.

This is because the ETF’s unique function allows money to flow in and out of them, without disturbing the underlying assets.

What they say“Because the SEC has rejected the application to convert GBTC into an ETF, the next escalation point is to go through the legal branch,” Michael Sonnenshein, CEO of Grayscale, told Axios.

Grayscale “continues to advocate for ETF regulation, effectively eliminating the discount and getting investors what they want and deserve. It is a spot bitcoin ETF,” he added.

The math does not work for the benefit of the investor, because there is no guarantee that the discount will disappear now or at any time in the near future, according to Blue.

“You can buy GBTC at a 30% discount. I’ve seen Twitter threads and Reddit bulletin boards about the free money by buying this GBTC at a record discount,” he said. “It assumes that the discount will close, but it is unlikely and it will get worse.”
For example, Blue found that if an investor acquired GBTC at a premium on December 22, 2020, they would have achieved a return of 64% through October 2021. But had they invested direct in bitcoin, the investor’s gain of 160% over the same time period would be 2.5 times greater.

Between the lines: Grayscale’s application for a spot bitcoin ETF application was rejected by the Securities and Exchange Commission in late June.

Context: There were a number of rejections for the same reason as they rejected more than a dozen similar applications since they first rejected the Winklevoss twins’ proposal in March 2017: The SEC wants evidence that the bitcoin market is devoid of manipulation and fraud.

What’s next: Maybe the Supreme Court? Grayscale sues SEC.