The World's Biggest Bitcoin Trust Seems To Be Available For Purchase. Whether This Might Be A Price Scam

For institutional investment managers, GBTC has become a popular option to get into crypto. Ark Investment, owned by Cathie Wood, holds 7.9 million units for GBTC. Next Generation Internet ETF (ARKW), which is worth around $200 million.

Digital Currency Group, Grayscale’s parent firm, has authorised $250 million in share repurchases across its nine publicly traded trusts.

The trust traded at a 29 percent discount to its NAV of $34.84 per share at Monday’s closing price of $24.67.

Anything trading at 70 cents on the dollar in closed-end funds could appear too good to pass up. The Grayscale Bitcoin Trust is currently offering such a deal to investors. However, in this scenario, a reduction may not be worth the cost.

Ark Investment, owned by Cathie Wood, holds 7.9 million units for GBTC

With over 700,000 investors and $24.1 billion in assets, the Grayscale Bitcoin Trust (ticker: GBTC) is the world’s largest publicly listed Bitcoin fund. It’s a private-placement trust that trades over the counter like a stock. It’s also one of the few options for investors in publicly listed stocks to get direct exposure to Bitcoin rather than through futures contracts, which is how exchange-traded funds like the ProShares Bitcoin Strategy ETF get their exposure to Bitcoin (BITO).

For institutional investment managers, GBTC has become a popular option to get into crypto. Ark Investment, owned by Cathie Wood, holds 7.9 million units for GBTC in the Ark Next Generation Internet ETF (ARKW), which is worth around $200 million. According to regulatory papers collected by Blockworks, Morgan Stanley owned more than 13 million shares of GBTC across 17 portfolios by the end of 2021. Morgan Stanley’s stake in GBTC was worth roughly $320 million at recent prices.

GBTC is currently trading at a significant discount to the value of its underlying Bitcoin assets, or net asset value. The trust traded at a 29 percent discount to its NAV of $34.84 per share at Monday’s closing price of $24.67. Investors in the fund would receive a 41 percent increase in the value of their assets if GBTC traded in line with its NAV–regardless of Bitcoin’s underlying movements.

Grayscale might close the discount if regulators allow the trust to be converted into an ETF. Grayscale has been attempting to persuade the Securities and Exchange Commission to allow such a conversion for some years. Grayscale re-submitted an application to turn GBTC into an ETF after the SEC approved a futures-based ETF last October. In an interview, Grayscale Investments’ chief legal officer, Craig Salm, stated that converting the product to an ETF is the best method for it to track its underlying assets.

The SEC, meanwhile, has shown little interest in approving a spot-based Bitcoin fund under Democratic chairman Gary Gensler. Fidelity, SkyBridge, WisdomTree, Valkyrie, and VanEck are among the fund companies that have failed to gain approval under his watch. The Securities and Exchange Commission did not reply to a request for comment. Grayscale claims that since the SEC has approved a futures-based ETF, it should also approve a spot-based ETF. In November, Grayscale’s lawyers wrote to the SEC, claiming that the agency would unfairly discriminate against the company if it rejected its application.

The SEC would be handling two similar financial products differently if it approved a futures ETF but denied a spot ETF, according to Salm. We’re excited to work with the SEC on that. However, some ETF experts believe Grayscale will hit a brick wall at the SEC under Gensler. I don’t buy this claim that the SEC has broken securities rules and that Grayscale’s conversion should be allowed before other Bitcoin trusts, Dave Nadig, chief investment officer and director of research at ETF Trends, said.

Other investment companies are pursuing clearance for new ETFs, he says. Converting a trust to an ETF may necessitate a change in the trust’s listing exchange, new trading counterparties, and difficult regulatory permissions. It’s the difference between moving into a whole new house and packing up and unwinding your old one before moving into the new one, he explains. And under a Democratic administration, the political atmosphere isn’t exactly friendly. Democrats have been slamming the crypto industry in congressional hearings, and Gensler has indicated that he’d rather issue stronger crypto regulations than sign off on the first Bitcoin ETF.

$250 Million In Share Repurchases Across Its Nine Publicly Traded Trusts

It’s not on the top of the SEC’s priority list, Nadig says. A futures product was authorized as a relief valve for the fund industry, but I don’t see any movement toward a spot ETF in the next year or two. The only way for GBTC’s discount to reduce if it doesn’t convert to an ETF is for market demand to push the trust’s price closer to the NAV. Digital Currency Group, Grayscale’s parent firm, has authorized $250 million in share repurchases across its nine publicly traded trusts. However, that isn’t nearly enough to move the needle on GBTC.

Normally, a 29% discount would entice activist hedge funds to pressurize a fund sponsor into making a tender offer, compelling the sponsor to buy back shares at close to NAV. Grayscale’s corporate statutes, according to Barron’s, make it difficult, if not impossible, for hedge funds to undertake such a proxy campaign. There’s no way for anyone to arbitrage the GBTC discount away, Nadig explains. Investors wishing for Bitcoin exposure can, of course, buy it directly rather than paying an ongoing fund fee—in Grayscale’s instance, a 2% expense ratio or 0.95 percent for the ProShares Bitcoin futures ETF.

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Andrew is a blockchain developer who developed his interest in cryptocurrencies while his post-graduation. He is a keen observer of details and shares his passion for writing along with being a developer. His backend knowledge about blockchain helps him give a unique perspective to his writing