Grayscale Trust’s Endlessly Widening Discount

The Grayscale Bitcoin Trust (GBTC) is showing a bit of life lately—amid a plummeting year—as bitcoin prices surge and the fund’s discount narrows. 

In the days following the spectacular implosion of crypto exchange FTX, GBTC’s discount to its net asset value widened, reaching a record 41.7% last week. On Tuesday, the market price of GBTC narrowed to 39.8% below the value of its assets—still massive. 

Judging by the hefty discount, investors remain skeptical that the Securities and Exchange Commission will allow GBTC to convert into an exchange-traded fund anytime soon, a conversion it has sought for more than a year. 

The SEC has denied spot bitcoin ETFs from listing on U.S. exchanges for over nine years. In the aftermath of FTX’s demise, investors are worried the SEC may be more resolved than ever to not approve one.  

In June, GBTC's manager, Grayscale Investment Advisors, sued the SEC, saying the agency failed to apply consistent treatment to investment vehicles and arbitrarily blocked GBTC’s conversion into an ETF.  

“The SEC is failing to apply consistent treatment to Bitcoin investment vehicles as evidenced by its denial of GBTC’s application for conversion to a spot ETF, but approval of several Bitcoin futures ETFs,” the company wrote June 29 after its effort to convert the trust was denied. “If regulators are comfortable with ETFs that hold derivatives of a given asset, they should logically be comfortable with ETFs that hold that same asset.”  

GBTC’s discount effectively gauges how likely the market believes the conversion is to happen—whether it be because the SEC changes its stance on spot bitcoin ETFs or because GBTC prevails in its lawsuit against the commission.  

Anyone who buys GBTC at a discount would profit handsomely if and when it becomes an ETF. At that point, the ETF’s creation/redemption mechanism would force the price of the fund to trade in line with its net asset value. 

How It Got Here  

GBTC began to consistently trade with a discount around March 2021. Before that, it usually traded with large premiums. 

As a product that could be easily bought and sold using a traditional brokerage account, many investors considered GBTC to be a good way to get exposure to bitcoin without having to deal directly with the rough-and-tumble world of crypto.  

To some investors, even crypto-focused brokerages that styled themselves after familiar stock brokerages were too foreign and unknown to deal with—a sentiment vindicated by FTX’s collapse last week.  

For a long time, those investors were willing to pay a premium to buy GBTC, meaning they paid more for the fund than its underlying assets were worth. This was the norm between early 2015 and early 2021. 

But as more avenues to buy and sell bitcoin opened up in 2021, including through popular apps like PayPal, Venmo and Cash App, GBTC’s appeal diminished. 

Investors weren’t willing to pay a premium for GBTC anymore. In fact, they were demanding a discount to buy the trust, which had no mechanism to keep its market price close to its net asset value.  

In particular, there was no way for GBTC investors to redeem their shares for bitcoin, so the connection between the trust’s market price and the price of bitcoin was tenuous.  

The discount started out small, then kept growing as the prospect of an ETF conversion dimmed.  

Betting on a Rebound
Few investors thought that GBTC’s discount would widen by so much so quickly. This summer, crypto hedge fund Three Arrows Capital (3AC) was wiped out in part due to bad trades on GBTC. 3AC made leveraged bets under the assumption GBTC would maintain a premium, an assumption that proved disastrously wrong.  

But that hasn’t stopped other big-name investors from buying into GBTC. Bloomberg reported this week that Cathie Wood’s ARK Next Generation Internet ETF (ARKW) scooped up $2.8 million worth of GBTC on Monday. The fund is currently the ETF’s ninth-largest holding.  

Unlike 3AC, Wood’s ARKW isn’t leveraged, so the worst that could happen is GBTC’s discount keeps widening and/or underlying bitcoin prices keep tanking. And Wood, who famously takes a really long-term view of things, doesn’t necessarily have any pressure to see the discount close right away. 

E-mail Sumit at [email protected] or follow him on Twitter @sumitroy2