A Spot Bitcoin ETF More Likely, But Far From Guaranteed

What are the chances that the SEC approves the first spot bitcoin ETF in the U.S. now that BlackRock is in the mix?  

Pretty good, according to one market-based indicator. 

The difference between the market value of the Grayscale Bitcoin Trust (GBTC) and its net asset value narrowed to its smallest level in nine months on Tuesday. 

GBTC has been trading at a substantial discount to its NAV for more than two years as demand for the trust has waned. 

According to Grayscale, the current structure of the fund precludes redemptions, which means that the massive discount can’t be arbitraged away. 

That’s why the firm has attempted to convert GBTC into an exchange-traded fund. ETFs typically trade close to their NAV due to the creation/redemption mechanism that allows large discounts and premiums to be arbitraged away.  

But GBTC’s conversion has been stymied by the SEC. A year ago, the regulator disapproved a rule change that would have turned GBTC into an ETF on the grounds that the ETF’s listing exchange, the NYSE Arca, couldn’t protect investors from potentially “fraudulent and manipulative acts and practices” in the market for bitcoin. 

It echoed similar arguments that the SEC has made over the past 10 years in blocking spot bitcoin ETFs. 

But this time, the SEC’s rejection didn’t go unanswered. In June 2022, Grayscale sued the regulator. In its lawsuit, it accused the SEC of acting inconsistently and of being “arbitrary and capricious.” 
 
The crux of Grayscale’s argument is that because the SEC had approved bitcoin futures ETFs, it should also approve spot bitcoin ETFs.  
 
“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,” the firm said.  

Grayscale expects a verdict in its case by the end of September.  

Widening Discount  

Ever since Grayscale announced its lawsuit against the SEC, there’s been hope that the firm might prevail against the regulator. 

But those hopes never manifested themselves in the GBTC discount. Anyone who believes that Grayscale will win its case and therefore, GBTC will soon become an ETF, could buy the fund and profit from the conversion.  

Instead, after the Grayscale lawsuit was unveiled last June, the GBTC discount widened from around 30% to as much as 48% in December.  

Much of that has to do with the implosion of FTX and the regulatory crackdown that followed. Just two weeks ago, the SEC sued Binance and Coinbase, two of the largest crypto exchanges in the world, for violating U.S. securities laws.  

GBTC’s discount was sitting around 41% on the day those lawsuits were announced, within the 35% to 48% range it’s been in over the past six months.  

Such a large discount suggested that investors didn’t see a high likelihood of Grayscale prevailing in its lawsuit against the SEC, or of the SEC organically changing its tune on spot bitcoin ETFs.  

Real-Time Indicator  

You can think of GBTC’s discount as a real-time, market-based indicator of how investors view the likelihood of a spot bitcoin ETF getting approved.  

A successful conversion of GBTC into an ETF would instantly close the gap between the fund’s price and the value of its bitcoin holdings.  

Assuming a flat bitcoin price, purchasing GBTC at a 48% discount to its NAV would result in a 92% gain. Even from today’s price, a closure of the discount would lead to a 49% gain. 

Since BlackRock applied for a spot bitcoin ETF on June 15, GBTC’s discount has shrunk, from around 42% to 33%. 

A narrowing of the discount suggests investors view an increasing likelihood of a spot bitcoin ETF in the U.S. being approved.  

Strong Reputation  

As the No. 1 issuer of U.S.-listed ETFs, with $2.4 trillion in assets under management, there’s been a perception that BlackRock wouldn’t have filed for a spot bitcoin ETF unless it was confident that it could successfully launch one. 

BlackRock’s reputation, combined with its intention to partner with a spot crypto trading platform to assuage some of the SEC’s market manipulation concerns, have pushed spot bitcoin ETF hopes to their highest levels since 2021, when it became increasingly clear that the regulator would allow bitcoin futures ETFs to trade in the U.S. for the first time. 

GBTC’s narrowing discount reflects those hopes.  

That said, at 33%, the GBTC discount is still hefty, and even slightly larger than it was on the day Grayscale announced its lawsuit against the SEC.  

For investors bold enough to make the bet that spot bitcoin ETFs are coming to the U.S., a 49% potential gain is lying on the table. The fact that such an opportunity still exists means not everyone is convinced BlackRock has some inside information or that it will be successful in its quest to launch a spot bitcoin ETF. 

Weighing against the prospects for a spot ETF is the SEC’s stance on crypto in general. To put it bluntly, the SEC is still very hostile when it comes to the asset class. Its lawsuits against Coinbase and Binance represent an existential threat to the crypto industry. 

And BlackRock’s ploy to partner with a spot trading platform might not convince the SEC to change its stance, particularly when said trading platform might be operating illegally in the SEC’s eyes.  

A Good Indicator  

There’s no free lunch in the markets. The potential for big gains comes with big risks. 

That holds true for the GBTC trade, which promises handsome rewards for investors to buy the fund ahead of a successful spot bitcoin ETF launch, but also big risks if the SEC continues to deny such ETFs from trading.  

As something that’s driven by investors putting real money on the line based on their spot bitcoin ETF expectations, GBTC’s discount is arguably the best market-based indicator we have when it comes to measuring the likelihood of a spot bitcoin ETF in the U.S. 

Today that indicator suggests a spot bitcoin ETF in the U.S. is more likely than it was a week ago, but is far from guaranteed.  

Contact Sumit Roy at [email protected]