There are bets that seem like sure things, and then there are bets that every other investor already thinks is a sure thing. The latter is a set-up for disappointment.
Such may be the case with
Grayscale Bitcoin Trust,
known by its ticker GBTC. The trust has long been the world’s largest Bitcoin fund, with assets of $26.8 billion. The fund owns nothing but Bitcoin and trades like a closed-end fund: its market price can deviate from its underlying net asset value or NAV, which is based on the coins it holds.
For the past few years, an investment in GBTC has been a bet on two things: the price of Bitcoin and prospects for GBTC’s price to narrow a wide discount to its NAV.
Lately that trade has been phenomenal. Bitcoin has rocketed164% this year to about $44,000. GBTC has fared even better, gaining 327%. The shares closed at $35.51 on Friday.
GBTC has done so much better than Bitcoin because its price has narrowed sharply to the fund’s NAV, falling to 11% from near 50% during the crypto crash a year ago.
The big hope, of course, is that Grayscale gets its wish and converts the trust into an exchange-traded fund. Doing so would close the NAV almost entirely due to the way ETFs trade, with market-makers keeping the price and NAV largely in line.
The big roadblock has been the Securities and Exchange Commission, which has yet to approve any Bitcoin ETF. But that could soon change. The SEC is now under pressure to approve Grayscale’s conversion, following a loss in court over the issue.
GBTC might not be first out of the gate. The SEC faces a January 10, 2024 deadline to approve or deny an application by ARK Investment Management. GBTC’s approval could come before or after that.
Either way, GBTC is looking far less attractive as an arbitrage trade on its NAV. Barron’s in October identified GBTC as an opportunity when the fund traded at a 21% discount to NAV. At 11%, it’s now far less compelling.
The timing of an approval is one concern. SEC officials have met frequently with executives from Grayscale,
BlackRock,
Invesco
and other would-be issuers to hammer out details of how the funds would function, according to public filings. But there could still be hiccups. For one, the agency could ask ETF sponsors to withdraw their applications and refile. An issuer might comply to keep up a good relationship with its regulator. But any delays might not be taken kindly by traders in Bitcoin or GBTC.
Another possibility is that the SEC will avoid appearing to “pick a winner,” allowing several ETFs to launch at the same time. Grayscale has a good argument for being in the first batch—given that its bid to convert is one of the oldest.
The SEC did not respond to requests for comment. Grayscale said in a statement that the company “continues to engage constructively with the SEC on GBTC’s uplisting to NYSE Arca.”
Some hedge funds have bought GBTC while shorting Bitcoin, aiming to capture an arbitrage trade in its price without taking a risk on Bitcoin.
“We are confident they will be able to convert,” said James Elbaor, a frequent Grayscale critic and founder of Marlton LLC, which manages a hedge fund focused on closed-end funds, in an email. Elbaor said he’s hedging his Bitcoin exposure with futures.
Such strategies aren’t easy for retail investors to implement, though. If a spot Bitcoin ETF approval is already baked into Bitcoin’s price, it could trigger a selloff when the SEC does finally give the nod. And any delay in the ETF approval could cause investors to panic and sell, pushing up the discount.
GBTC is on the road to converting to an ETF, but there’s little reason for investors to hold on until the end of the race. Those who have held GBTC through all the drama have already won.
Write to Joe Light at [email protected]
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