Jul 13, 2022 - Economy

The biggest bitcoin fund is on sale

Illustration of the bitcoin logo with balloons that read "30% off! and "sale!" on them attached

Illustration: Sarah Grillo/Axios

In the case of Grayscale's $12 billion Bitcoin Trust, what's on sale is not necessarily a deal.

  • Shares of the largest bitcoin investment vehicle in the world are trading at a discount to the underlying assets (bitcoin) that they represent.
  • That discount has widened to as much as 35% recently, to the chagrin of some investors who paid a higher price for shares (or a premium) than the bitcoin they represented.
  • Why? "Simply put, there are more shares on the market than people want to buy that has created this perpetual discount," Bobby Blue, an analyst at research firm Morningstar, tells Axios.

Why it matters: There is no way to get bitcoin out of the Grayscale Bitcoin Trust also known by its ticker symbol "GBTC."

  • Recall crypto lender BlockFi said Tuesday that it unwound its entire position in GBTC and would not take shares as collateral, before walking back the statement hours later.

How it works: That's because GBTC is not an ETF (it wants to be). And its trust structure makes them inflexible to ever-changing supply and demand.

  • So when GBTC was only bitcoin game in town, market demand outstripped supply, shares of GBTC was trading at a premium or for more than the underlying bitcoin it represents.
  • This was the case for much of 2015 to 2019.
  • And when supply outstripped demand (roughly around the time other bitcoin ETFs became available), shares of GBTC flipped to trading at a discount.

There are three factors that drive this gap between price and the underlying net asset value, according to Blue.

  • Other ways to trade bitcoin have proliferated.
  • Fees—GBTC charges 2% annually.
  • And also, "Grayscale may have misstepped and overissued shares to the market," according to Blue.

The other side: A spot bitcoin ETF approval would allow Grayscale to convert its trust into an ETF, closing the gap between price and the underlying bitcoin.

  • That's because ETFs' unique feature allows money to flow in and out of them, without disturbing the underlying assets.

What they're saying: "Because the SEC has disapproved the application to convert GBTC to an ETF, the next point of escalation is to go through the judicial branch," Michael Sonnenshein, CEO of Grayscale, tells Axios.

  • Grayscale is "continuing to advocate for ETF regulation, effectively eliminating the discount and get investors what they want and deserve. That is a spot bitcoin ETF," he added.

The math does not work in favor of the investor, because there's no assurance that the discount will disappear now or anytime in the near future, according to Blue.

  • "You can buy GBTC at a 30% discount. I’ve seen Twitter threads and Reddit message boards about the free money at buying this GBTC at a record discount," he said. "That assumes the discount will close, but that’s unlikely and it’s getting worse."
  • For example, Blue found that if an investor picked up GBTC at a premium on Dec. 22, 2020, they would have picked up a 64% return through Oct. 2021. But had they invested directly in bitcoin, that investor's 160% gain over the same time period would have been 2.5 times larger.

Between the lines: Grayscale's application for a spot bitcoin ETF application was rejected by the Securities and Exchange Commission in late June.

Context: It followed a series of rejections for the same reason they denied more than a dozen similar applications since they first denied the Winklevoss twins' proposal in March 2017: the SEC wants proof that the market for bitcoin is devoid of manipulation and fraud.

What's next: Maybe the Supreme Court? Grayscale is suing the SEC.

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