GBTC: Undervalued opportunity amid SEC battle and upcoming Bitcoin halving

Since October 2022, I have accumulated Bitcoin (BTC-USD) strategically with a special interest in Grayscale’s crypto funds, such as Grayscale Bitcoin Trust (OTC:GBTC). I plan to keep this investment until Grayscale transfers it to an ETF, and consequently eliminates the discount to NAV found in this closed-end fund. Currently, GBTC is trading at a significant discount of 40.4% – a notable deviation rarely seen in US-traded closed-end funds. This significant discount seems unjustified, especially in light of Grayscale’s legal action against the SEC (I discussed that case in more detail here) to prevent conversion of GBTC to an ETF. The discount is wider than in my previous article.

The lawsuit initiated by Grayscale indicates the firm’s intention to transform the closed-end fund into an ETF/ETN, likely driven by obvious business motives. Conversion of GBTC to an open product will result in the creation of the largest crypto ETF based in the world. Typically, the largest ETF/ETN within a category generates a significant proportion of investment flows and therefore a very profitable fund to run.

Note that I am generally bullish on Bitcoin and I have written countless articles on Bitcoin for Seeking Alpha (from when it was trading below $1000 and there was still discussion about whether it should even be discussed as an investment). If you don’t like Bitcoin you can still like a GBTC position but paired with a short in Bitcoin through futures or a close proxy like MSTR but these are advanced tactics and if you are not an experienced trader it is probably better to move on to another idea.

There are 5 key drivers for me liking a GBTC position.

1) Grayscale’s oral arguments in the Grayscale vs SEC case went very well. The court’s decision may arrive by the end of the year (see timeline here)

2) The tension around the financial system flares up again driven by the news flow around the First Republic (FRC). The recent banking crisis has clearly been a catalyst for crypto. I don’t think it’s a sustainable driver or that it necessarily should be a driver, but the market does what it does without my blessing. Bitcoin’s popularity is partly a result of GFR and the resulting widespread unhappiness across the financial industry. That feeling is now prominent again.

3) Representative French Hill (of the Digital Asset Committee) and Majority Whip Tom Emmer sent a letter (read the full text here) to SEC Chairman Gary Gensler, expressing concern about regulatory inconsistency in the treatment of spotbitcoin exchange-traded product applications. They argue that the SEC’s refusal to approve spot bitcoin ETPs is inconsistent and does not take into account other jurisdictions where similar products have been approved. They also criticize Gensler’s differential treatment of bitcoin futures ETPs, which are allowed to trade in the US, and bitcoin spot ETPs, which are continually denied.

Basically, this letter echoes Grayscale’s argument in Grayscale vs SEC. However, I think it is important that there is further pressure on the SEC to mend its ways. I happen to believe in the long-term viability of Bitcoin. However, I have tons of other investments and I won’t lose much sleep if it goes through. So I’m biased, but I don’t think I’m emotionally over-invested in this asset class. While I try to weigh the benefits objectively, I really think the SEC has treated Bitcoin a little unfairly. Grayscale has a good chance of being vindicated.

4) The next Bitcoin halving is likely less than a year away. Essentially, the Bitcoin halving refers to the process where the rewards that miners receive for verifying and adding new transactions to the blockchain are halved. When Bitcoin was first introduced in 2009, the reward for successfully mining a block was 50 Bitcoins. Since then, halvings have occurred in 2012, 2016, and 2020, reducing the block reward to 25, 12.5, and 6.25 Bitcoins, respectively. The next halving is expected to take place around 2024, further reducing the reward to 3,125 Bitcoins per block. The reduction in supply (because the reward goes down, but also because older mining equipment suddenly becomes unprofitable) this tends to create an imbalance between supply and demand, which can lead to an increase in the value of Bitcoin. As the number of new Bitcoins entering the market decreases, investors often expect a price increase due to scarcity.

I was surfing the internet looking for a diagram illustrating the effect of the halving and I found this fun diagram from the Blockchain Center:

Don’t take the rainbow channel too seriously I guess, but the chart shows where the halvings happened and the price action afterwards. You would expect traders to increasingly anticipate this event and I have noticed talk of the halving starting to pick up. I think chatter will increase as the date approaches and as Bitcoin’s bullish price action confirms that narrative.

5) The fifth reason is of course the discount. If Grayscale turns the closed-end fund into an ETF, that’s a 66% increase in itself. It is reinforced by Bitcoin price action. Given the fact that I am bullish on Bitcoin, it is a very attractive proposition. The

6) Technical generally seems to support GBTC and Bitcoin. The 50-day GBTC MA just broke through the 200-day, which is a classic technical signal, but others paint a similar picture (but not exclusively).

In conclusion, despite the setbacks in the crypto world and the ongoing battle between Grayscale and the SEC, there are compelling reasons to maintain a bullish stance on a GBTC position. The case development in shades of gray vs. The SEC, increased pressure on the SEC from lawmakers, anticipation of the next Bitcoin halving, and the significant discount on GBTC all contribute to an attractive investment opportunity. Additionally, technical indicators are generally supportive of both GBTC and Bitcoin, providing further encouragement for investors. While the future remains uncertain, the potential for asymmetric returns (through the compounding effect of the discount and the price of Bitcoin) makes GBTC an appealing prospect for those who have confidence in the long-term viability of Bitcoin and the transformation of the closed end. fund into an ETF.

Editor’s Note: This article discusses one or more securities that are not traded on a major US exchange. Be aware of the risks associated with these stocks.