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Numerous Bitcoin ETFs have been approved by the SEC over the last year, but a spot fund, widely-regarded as the most in-demand fund structure, remains elusive. The commission’s upcoming decision on whether it will allow the Grayscale Bitcoin Trust (GBTC) to convert itself into a spot ETF will be the most significant to date, considering GBTC is the largest Bitcoin-linked investment vehicle currently trading in US markets.

The timing of the SEC’s judgement couldn’t be more critical, following a massive sell-off in Bitcoin that has pushed the discount to NAV on GBTC shares near 35%. Grayscale contests that a transition to a spot fund would open up billions of dollars of value for investors in GBTC and that, if their application is denied, they will take up legal action against the commission. Simultaneously, dissent toward the SEC’s consistent rejection of Bitcoin spot ETFs is beginning to rise from the regulator’s own board of commissioners.

Related Funds and Assets: Grayscale Bitcoin Trust (GBTC), Grayscale Ethereum Trust (ETHE), Bitcoin (BTC-USD), Ethereum (ETH-USD)

Several Bitcoin-linked investment vehicles have launched in the US throughout the past year. The first ETF based on Bitcoin (BTC) futures contracts, the ProShares Bitcoin Strategy ETF (BITO), began trading about 8 months ago and registered one of the biggest launches on record for ETFs, raking in $570 million worth of inflows on day one. Several other futures-based ETFs have subsequently launched in the US, alongside Valkyrie’s Bitcoin Miners ETF (WGMI). Even an inverse Bitcoin ETF, also managed by ProShares, has been rolled out this week, giving investors the ability to make short-side bets on BTC futures.

A spot Bitcoin ETF, however, remains elusive in US markets due to regulatory issues.

Largest Bitcoin Investment Vehicle Trading at Historic Discount

The most popular way for investors to gain indirect exposure to Bitcoin continues to be Grayscale Investments’ Bitcoin Trust (GBTC). GBTC launched in 2013, received a public quotation in May 2015, and became an SEC reporting company in January 2020. Today, the Trust is the largest Bitcoin investment vehicle in the world and, with $13.3 billion in AUM, equivalent to nearly 652,000 BTC, or more than 3% of all BTC in circulation.

Some key institutional names with large holdings in GBTC, as reported in Fintel data, include ARK Investment Management, Morgan Stanley, Rothschild Investment Corp., and Kinetics Mutual Funds. At the end of 2021, for instance, Morgan Stanley appears to have held more than 13 million shares of GBTC across 17 portfolios, according to regulatory filings highlighted by Blockworks.

While GBTC investors do get exposure to a trove of Bitcoin, the current structure of the trust has issues.

Much like the futures-based ETFs, the Trust can underperform (or outperform) the net asset value (NAV) of the underlying BTC assets it is supposed to track, creating a discount (or premium) in the market price of GBTC. In recent days, that discount has grown to all-time highs. On June 17, for instance, GBTC was trading at $12.47 per share but Grayscale reports BTC holdings per share were $18.92 – a discount of more than 34%. Back in February of 2021, the opposite issue was at play, with GBTC shares trading above NAV, creating a premium of as much as 12%.

Grayscale offers several other crypto-backed Trusts including the Grayscale Ethereum Trust (ETHE), as well as more diversified products like the Grayscale Smart Contract Platform Ex-Ethereum Fund, a single trust that holds several other cryptocurrencies with smart contract functionality.

With the current market price of BTC hovering around $20,400 as of this morning, the current GBTC discount also implies that each unit of BTC within the fund is effectively priced near $13,500. That presents an opportunity for investors to cash in on particularly cheap BTC that should eventually appreciate toward a more normalized level versus the Trust’s NAV. To address this discount, specifically, Grayscale has recently applied to convert their trust into a spot Bitcoin ETF, which would…

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