Wall Street stalwart Morgan Stanley recently boosted its ownership of Grayscale Bitcoin Trust (GBTC) as it awaits the vehicle’s proposed conversion to a fully-fledged exchange-traded fund (ETF).
In total, Morgan Stanley funds owned 13 million GBTC shares as of the end of 2021, worth more than $371 million at press time.
Regulatory filings indicate the bank had allocated GBTC stakes across 17 funds it operates, reports Blockworks.
- GBTC exposure for each fund ranged between 0.7% to 1.1%.
- Morgan Stanley’s Growth Fund held 4.3 million GBTC shares ($123 million), up 18% from the 3.6 million shares ($103 million) it held on one quarter earlier.
- The firm’s Insight Fund holds another 1.7 million shares ($48.6 million).
GBTC is a non-ETF, closed-ended trust and trades at a substantial 29% discount to the Bitcoin it controls. The trust currently manages 654,885 BTC ($27.66 billion), equal to more than 3% of all circulating Bitcoin.
GBTC trades at a discount to its Net Asset Value because shareholders are not permitted to redeem shares for the trust’s Bitcoin.
Historically, a lucrative arbitrage opportunity attracted the institutional and accredited investor crowd to buy GBTC stock.
Dwindling enthusiasm means that trade is no longer viable, as retail investors no longer pay a premium for richer folk to exploit.
Futures-based Bitcoin ETFs that loosely follow Bitcoin’s price already exist (albeit with high fees), while Canadian markets boast several spot Bitcoin ETFs.
Still, the US Securities and Exchange Commission (SEC) has not approved a spot Bitcoin ETF to trade on US markets, despite years of trying and dozens of applications.
The SEC has a comment period open for Grayscale’s proposed conversion of GBTC into an ETF. Coinbase general counsel Paul Grewal and BlockFi chief Zac Prince were among the hundreds of letters sent so far.
Morgan Stanley appears confident about ETF conversion
As noted by BlockFi’s Prince, Grayscale operates a Bitcoin trust and not an ETF that can invest in digital assets.
Prince expressed concern that BlockFi’s retail holders of investment products containing GBTC are losing money due to its poor performance.
In a letter to the SEC, Grayscale’s lawyers argued that the regulatory agency’s approval of bitcoin futures ETFs and rejection of spot market ETFs violate the Administrative Procedures Act.
This Act governs the process by which regulatory agencies establish rules and adjudicate administrative legislation.
For years, the SEC has repeatedly rejected applications for ETFs that hold actual Bitcoin. Its main reason for denial has been price manipulation.
Because most Bitcoin trades offshore on exchanges with extreme leverage, dirty money can easily manipulate markets, goes the SEC’s stance.
The SEC previously rejected VanEck’s ETF application in November, just two days before a 240-day review period expired.
Regulators expressed concern that the Chicago Board Options Exchange’s BZX Exchange applicant did not meet legal requirements laid out by the Securities Exchange Act of 1934.
Industry insiders like the Blockchain Association predict the SEC will continue denying spot ETF applications.
Spokeswoman Kristin Smith told Blockworks that they are steadily “moving the process along.”
Despite these headwinds, Morgan Stanley has shown enough confidence in Grayscale Bitcoin Trust by boosting its stake to 13 million GBTC shares.
In fact, finance portals list Cathie Wood’s Ark as GBTC’s number one institutional holder, with about 7.9 million shares ($226 million) as of its December 2021 disclosure (Ark has since been unwinding its GBTC positions).
Turns out, Morgan Stanley now owns nearly two-thirds more GBTC stock than Ark — and shows little sign of slowing down.
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