GBTC - Grayscale Bitcoin Trust's ETF Approval Outlook

2024-01-05 12:15:29 ET

Summary

• Sources believe the SEC and applicants are in the final stages of approving several spot Bitcoin ETFs, which could have a significant impact on the crypto market.
• GBTC is likely to be among the first wave of approved ETFs due to its court case win against the SEC that nudged the SEC towards reviewing spot Bitcoin ETFs.
• If GBTC conversion to spot ETF is approved, its discount to NAV will likely narrow, providing arbitrage gains for investors. If not approved, the discount could widen.

A spot Bitcoin ( BTC-USD ) ETF approval seems imminent. According to sources , the SEC and applicants are currently in the conclusive stages of the first wave approval process for several spot Bitcoin ETFs.

The spotlight has been on the spot Bitcoin ETF process for several months, being a major catalyst that propelled Bitcoin's price to a ~156% gain last year. This momentum has not only affected Bitcoin directly but also created a ripple effect, influencing the prices of other crypto-exposed assets. Stocks of Bitcoin miners, crypto exchanges, and Bitcoin-related funds like Grayscale Bitcoin Trust ( GBTC ) have all experienced significant gains.

Before getting bigfooted by BlackRock (BLK), Grayscale was the initial focal point in the spot Bitcoin ETF application process as it was its victory in its court case with the SEC that nudged the SEC toward reviewing spot Bitcoin ETFs. Logically, this makes GBTC likely to be in the first wave of spot BTC ETFs approved by the SEC. Sources are confident an approval can happen at any moment and the latest signs of an imminent spot Bitcoin ETF approval are the filings of form 8-A by the ETF issuers, including Grayscale.

From Premium to Discount to Par

GBTC’s discount to net asset value ("NAV") has been narrowing since sentiments in the crypto market improved in the past year. From about -40% discount to NAV a year ago and -20% in October, the current discount is around -7%. As the timeline for approval for a spot Bitcoin ETF draws near, and in anticipation that the GBTC fund could get approval for conversion to spot Bitcoin ETF, the GBTC discount to NAV has continued to narrow. While no one outside the SEC knows exactly when a spot Bitcoin ETF approval will happen or if several spot Bitcoin ETFs will be approved at once, there is speculation that Grayscale might be among the initial ETFs approved, because of its lawsuit win that has brought the ETF application process thus far.

There are likely to be two scenarios that would play out: one, if GBTC gets approval to convert to a spot ETF, and the other if it doesn't get approval to convert. If the Grayscale spot Bitcoin ETF gets approved in the first wave of approvals, GBTC price will likely narrow out all of the current discount and be at par with NAV, as GBTC will undergo a structural change to become an ETF and will closely track the underlying asset's (Bitcoin) price. This will provide arbitrage gains to GBTC holders who purchased the shares at a previous discount.

However, if GBTC doesn't get the approval to convert to a spot Bitcoin ETF, the trust would maintain its current structure as a closed-end fund, and GBTC’s discount to NAV could widen, potentially resulting in a lower market price for GBTC shares.

Also, if other ETFs get approved first, say BlackRock’s gets approved before Grayscale’s, investors might perceive the existing closed-end structure of the GBTC fund as less desirable compared to a spot ETF, and this could lead to a steep discount to NAV for GBTC. This widening discount might result in a lower market price for GBTC shares because supply/demand for the shares could become weak.

Current exposure to GBTC’s potential premium or steep discount to NAV (depending on the outcome of the ETF approvals in the coming days or weeks) demands some caution. ARK Invest sold its entire remaining GBTC holding last week and bought 4.32 million shares or about $100 million worth of ProShares Bitcoin Strategy ETF ( BITO ) shares, a move that ARK's CEO Cathie Wood said was made “out of an abundance of caution.”

BITO currently has a -0.10% discount to NAV and typically maintains a tiny margin of premium or discount to NAV because it utilizes Bitcoin futures contracts. By opting for BITO, ARK Invest appears to be seeking a degree of risk mitigation. BITO's structure provides a level of risk management compared to holding GBTC (if GBTC doesn't get the approval to convert to a spot ETF), given the different structure and operation model of the two funds. One key difference in structure is that BITO allows for the creation and redemption of shares by authorized participants (APs) in exchange for creation units, helping maintain BITO's market price close to its NAV; while GBTC’s number of shares is fixed and does not allow APs to create or redeem shares.

Takeaway

Amidst high speculation of a spot Bitcoin ETF approval, there is still uncertainty as no official announcement has been made by regulators. Assuming the spot ETF approvals finally happen and GBTC is granted approval to convert to a spot Bitcoin ETF, what early-mover advantage will it have over other ETFs? One potential differentiator I’d consider is the expense ratio and fees, which are integral components of the ETF structures.

Fidelity has set its Bitcoin ETF fee at 0.39%, Ark / 21Shares have proposed a 0.8% fee in their latest S-1 amendment , dated December 28, 2023. Grayscale did not disclose APs or its ETF fee structure in its latest amended ETF application. This makes Grayscale lag, in my view.

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