Since 2015, the publicly traded Grayscale Bitcoin Trust (GBTC) (OTCQX:GBTC) has traded at an average premium of 20% above the spot price of bitcoin. Historically, this trust provided one of the few investment vehicles for institutions seeking bitcoin exposure from a US-regulated, listed, and SEC reporting company. Today, shares of GBTC trade at a historic discount to its Net Asset Value (NAV): -35%.
Specifically, GBTC closed for trading on October 5 at $12.02 per share despite $18.45 per share of bitcoin backing each one.
GBTC trades at a discount because the redemption of shares for bitcoin is not allowed. The trust is a Pacman-like, one-way vehicle; bitcoin goes in but may not be redeemed out.
Grayscale created GBTC in 2013 as a way for investors to gain exposure to the currency without directly holding any in self-custody. GBTC currently manages 635,240 bitcoin, worth $12.8 billion at current spot prices. Each of its 692,370,100 shares outstanding is backed by 0.00091723 bitcoin.
A new Grayscale Investments subsidiary, Grayscale Securities, now manages GBTC. It overtook the duties after Grayscale Investments terminated a deal with its crypto broker, Genesis. The transfer was friendly; both Genesis and Grayscale are portfolio companies of Barry Silbert’s Digital Currency Group.
The insurmountable challenge of a bitcoin spot ETF approval
GBTC currently operates as a bitcoin trust. Grayscale sent an application to the SEC to transform it into an ETF. So far, the SEC’s answer has been a definitive no.
Grayscale has even solicited public comments to the SEC using ad campaigns in support of GBTC’s conversion to an ETF. Again, no luck.
In June 2022, the SEC yet again rejected Grayscale’s application. It also turned down an application from Bitwise Asset Management to create a bitcoin spot ETF. The GBTC discount worsened even further.
There’s no mystery about why the SEC denies spot bitcoin ETF applications. Commissioners have reiterated the same denial for five years and Protos previously explained the hold-up: fake and manipulated bitcoin transactions.
The SEC has only approved bitcoin futures-based ETFs so far, deferring to the CFTC’s oversight of commodity futures.
Institutional investor interest could be a factor
Fidelity published a survey in September 2021 indicating that 52% of institutional investors held digital assets in their portfolios. However, 54% of respondents said that volatility is still a significant obstacle. 44% of respondents said they lacked an understanding of digital assets’ fundamentals.
In April 2022, 80% of institutional investors expressed confidence that digital assets could outperform more traditional forms of investment.
Then the Terra LUNA meltdown sent shockwaves throughout digital asset markets. Celsius Network, Voyager Digital, and Three Arrows Capital (3AC) filed for bankruptcy in the aftermath, and institutions that expressed investment interest in bitcoin suddenly re-evaluated.
In the wake of Terra LUNA’s collapse, institutional short selling hit new highs, with short-bitcoin investment funds receiving inflows of $18 million during the first week of September 2022 alone. Institutions could have caused GBTC’s worsening discount to NAV by dumping shares to meet margin calls on unrelated positions.
The GBTC discount could disappear if Grayscale Investments transforms it into an ETF, or if investors again become willing to pay more of a premium for GBTC’s non-redeemable bitcoin.
NASDAQ, for example, seems confident that institutional interest will remain in general bitcoin markets. Indeed, the giant exchange recently launched institutional bitcoin and crypto custody services.
Any investor who is confident that GBTC will convert to an ETF has an opportunity to acquire discounted bitcoin at today’s prices. The GBTC discount could, however, worsen. Also, it’s unclear if — or when — the SEC will approve GBTC’s ETF conversion.