Grayscale Bitcoin Trusts discount is tempting. Why it’s not a Slam Dunk.

For an investor, the fund has long been seen as an attractive way to gain exposure to crypto, despite its 2% annual management fee.

This is partly because it is easy to keep a broker account with other stocks and exchange traded funds, as opposed to direct ownership of Bitcoin, which often has to take place through a crypto trading platform such as

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Lately, the fund has also been tempting because it trades at an extreme 31% discount on its underlying holdings. So for every $ 12.06 investors spend on a share of GBTC, they get in theory ownership of $ 17.41 worth of Bitcoin.

The problem? The deletion of that discount looks further and further away.

The latest blow came this week, when the Securities and Exchange Commission rejected Grayscale’s bid to convert the trust into an ETF.

Grayscale and its investors have called for the conversion, because it would allow institutions to arbitrate the rebate through the usual process of redeeming the fund’s shares, resulting in an almost automatic profit for the investors who have been holding on.

Although the SEC last year approved an ETF that has Bitcoin futures, it has opposed such a decision on a spot ETF, among other things with reference to potential manipulation of crypto exchanges.

On Thursday, the trust’s price fell almost 9.5%, although the stock fell 6.5%, which may reflect investors’ disappointment.

Grayscale immediately sued the SEC after the denial, calling the decision arbitrary and capricious.

“Of course, we strongly disagree with the decision they made,” Grayscale Investments CEO Michael Sonnenshein said in an interview, noting that the fund’s rebate is “representative of what is now billions of dollars of unrealized shareholder value.”

Sonnenshein said his firm, in addition to the lawsuit, is talking to regulators and employees of lawmakers in Senate Banking and House Financial Services committees who may have influence.

A spokeswoman for the SEC declined to comment.

For GBTC investors, however, it is difficult to envisage a positive outcome, at least in the short term.

First there is the trial. In anticipation of the denial, Grayscale strengthened its legal team, by hiring former Attorney General Donald B. Verrilli Jr., considered an expert on the legal requirements Grayscale makes to reverse the decision. Sonnenshein said that the case could unfold in less than a year.

However, long-term supervisors of such cases are less sensuous.

“This trial is likely to take longer than Biden’s first term as president,” Cowen analyst Jaret Seiberg wrote in a research note, calling it a “high obstacle” for a court to overturn the decision.

It is also unclear how much pressure lawmakers can realistically put on the SEC to change course.

On Friday, Senate Banking Committee member Pat Toomey ranked (R., Pa.) On Twitter excoriated The SEC for rejecting Bitcoin ETFs, saying that SEC leader Gary Gensler had “imposed huge costs on investors without any legitimate justification.”

However, lawmakers may be shy about going beyond tough talk about the decision.

“It is difficult to see any legislator take a position that Bitcoin prices have fallen so much and other tokens have problems. That is why it can be rhetoric, but not action,” Seiberg wrote.

Grayscales Sonnenshein, for his part, says that investors in his trust are willing to wait and are well aware of the ups and downs of both the Bitcoin and ETF conversion battle.

“These people tend to have a longer time horizon for their crypto investments,” he said. They “can withstand volatility and know the arguments we’ve been floating in front of regulators for years.”

There are other ways for investors to access Bitcoin, for example directly through crypto platforms such as Coinbase and FTX or through a Bitcoin futures ETF such as ProShares Bitcoin Strategy (BITO).

Such vehicles do not give investors any kind of discount on buying crypto.

But, at least for now, Grayscale’s rebate does not represent as much a bargain as it does an effort on lawsuits and policies. Investors can win in the end, but there is no slam dunk.

Write to Joe Light at [email protected]