In closed-end funds, anything trading around 70 cents on the dollar may seem too good to pass up. Investors can get this kind of bargain now in the
Grayscale Bitcoin Trust
But this may be a case where a discount is not really worth the price.
The Grayscale Bitcoin Trust (ticker: GBTC) is the largest publicly traded bitcoin fund in the world with over 700,000 investors and $24.1 billion in assets. It is a private placement trust that trades like an over-the-counter stock. It is also one of the few ways that investors in a publicly traded stock can gain direct exposure to Bitcoin, rather than through futures – the mechanism of exchange-traded funds like the
ProShares Bitcoin Strategy ETF
GBTC has become a preferred way for institutional money managers to gain exposure to crypto. Ark Invest, led by Cathie Wood, owns 7.9 million shares of GBTC in
Ark Next Generation Internet ETF
(ARKW), worth approximately $200 million.
held more than 13 million shares of GBTC across 17 portfolios at the end of 2021, according to regulatory filings analyzed by Blockworks. At recent GBTC prices, Stanley’s stake in Morgan was worth about $320 million.
GBTC is trading at a steep discount to its underlying bitcoin holdings, or net asset value. At Monday’s closing price of $24.67, the trust was trading at a 29% discount to its net asset value of $34.84 per share.
If GBTC were to trade in line with its net asset value, investors in the fund would see a 41% gain in the value of their holdings, regardless of Bitcoin’s underlying movements.
One way this cut could close would be if regulators allow Grayscale to convert the trust into an ETF. Grayscale has been trying for years to convince the Securities and Exchange Commission to approve such a conversion. Following the SEC’s approval of a futures-based ETF last October, Grayscale has again submitted an application to convert GBTC to an ETF.
“Converting to an ETF is the best way for the product to track its underlying assets,” Craig Salm, chief legal officer of Grayscale Investments, said in an interview.
Yet the SEC, under Democratic Chairman Gary Gensler, has been reluctant to endorse a spot-based Bitcoin fund. Several other fund companies failed to gain approval under his leadership, including Fidelity, SkyBridge, WisdomTree, Valkyrie and VanEck.
The SEC did not respond to a request for comment.
Grayscale argues that since the SEC has approved a futures product, it should greenlight a spot ETF. The firm’s lawyers have drafted a letter to the SEC in November, arguing that the agency would “unfairly discriminate” against Grayscale if it rejected his candidacy.
By approving a futures ETF but denying a spot ETF, the SEC would “treat two similar investment products differently,” Salm said. “We look forward to engaging with the SEC on this.”
Still, some ETF pundits say Grayscale likely hits a wall at the SEC under Gensler. “I don’t buy this argument that the SEC somehow violated securities laws and should approve Grayscale’s conversion before other Bitcoin trusts are approved,” said Dave Nadig, Chief Investment Officer. and Director of Research at ETF Trends.
He points out that other fund companies are seeking approvals for new ETFs. Converting a trust into an ETF could require a change in its listing exchange, new trading counterparties and thorny regulatory approvals. “It’s the difference between moving into a brand new house or packing up your old house and unrolling it before moving into the new one,” he says.
And the political climate is not favorable under a Democratic administration. Democrats have criticized the crypto industry during congressional hearings, and Gensler signaled that he was far more likely to issue tougher rules on crypto than to sign off on the first Bitcoin ETF.
“It’s not anywhere near the top of the SEC’s agenda,” Nadig said. “They allowed a futures product as a relief valve for the fund industry, but I don’t see any movement toward a cash ETF in the next two years.”
Without an ETF conversion, the only mechanism for GBTC’s reduction to reduce would be market demand: buyers of the trust pushing its price closer to NAV.
Grayscale’s parent company, Digital Currency Group, recently authorized $250 million in share buybacks across its nine publicly traded trusts. But that’s nowhere near moving the needle on GBTC.
Usually, a 29% discount would prompt activist hedge funds to pressure a fund sponsor to launch a takeover bid, forcing the sponsor to buy back shares at a price close to net asset value. However, as Barron’s reported, Grayscale’s bylaws make it difficult, if not impossible, for hedge funds to mount such a proxy campaign.
“There is no mechanism for anyone to arbitrate the rebate in GBTC,” Nadig says.
Investors looking for exposure to Bitcoin can buy it outright, of course, without paying any ongoing fund fees – an expense ratio of 2% in the case of Grayscale or 0.95% for the ETF. ProShares Bitcoin futures.
Paying 71 cents for a dollar of Bitcoin sounds attractive. But investors might not recoup that 29 cents for some time.
Write to Daren Fonda at [email protected]