Grayscale Bitcoin Trust
(ticker: GBTC), the world’s largest Bitcoin fund at about $16.3 billion under management, won a major court victory this week, increasing the likelihood it will convert into an exchange-traded fund.
The market, on the other hand, is pricing the fund largely as it did before the U.S. Court of Appeals decision. GBTC for now trades like a closed-end fund, with a market price that deviates from the value of the Bitcoin it holds. On Aug. 24, GBTC closed at $17.68, a 24.6% discount to the underlying Bitcoin. On Thursday, it closed at a 20.6% discount.
That doesn’t make sense. If an investor can stomach the volatility and is looking for Bitcoin exposure anyway, it is worth betting the discount will close further.
Grayscale for years has sought to convert GBTC into an ETF, which would completely erase the difference. The Securities and Exchange Commission consistently shot down the applications, along with those of other fund providers, arguing the Bitcoin market has insufficient surveillance to detect fraud and manipulation.
After being rebuffed in 2022, Grayscale sued, arguing the SEC unfairly rejected its bid while also approving Bitcoin futures products such as ProShares Bitcoin Strategy (BITO), whose prices are tied to the same underlying market.
In a unanimous decision on Tuesday, three judges appointed by presidents from both political parties agreed with Grayscale. The decision doesn’t order the SEC to approve the application, but it does leave the agency with little room to reject it again.
Analysts for Bloomberg Intelligence, for example, earlier this week put the odds of the SEC approving Bitcoin ETFs this year at 75% and the odds for such funds being approved by the end of 2024 at 95%.
There will likely be bumps in the road.
The day of the court decision, GBTC’s discount moved as low as 11%, and some hedge funds and other investors that had bet on a favorable ruling closed their trades, said Steven McClurg, chief investment officer of Valkyrie Investments, which manages a hedge fund that owns GBTC and has separately applied to launch its own spot Bitcoin ETF.
The discount widened back out over the next couple of days, as investors better understood it could take some time for the GBTC conversion and the approval of other ETFs to occur.
One disappointment came Thursday, when the SEC officially put off a decision on the Bitcoin ETF applications of
BlackRock
(ticker: BLK),
WisdomTree
(WT), Fidelity, and others. The decision likely helped sink the price of Bitcoin, which has fallen around 4% over the last 24 hours to about $26,000.
“This isn’t an instantaneous conversion,” added McClurg, who said his fund traded around the court ruling but still owns shares.
The SEC’s real tell will be what it does, or doesn’t do, in court. With the decision issued, the SEC has 45 days to request for its case to be heard again by a broader panel of judges. The agency also can ask the Supreme Court to take up the case, but it might need buy-in from the Justice Department to go that route. Neither avenue, however, looks very promising given the ruling was unanimous.
The SEC declined to comment on Friday. The day of the court decision, the agency said it was reviewing the decision to determine its next steps.
Grayscale this week also said it was reviewing the court’s opinion and would pursue its next steps with the SEC.
Rather than fight the appellate decision, the SEC could also try to reject the GBTC application on other grounds, though the basis it would lean on is unclear. The agency could even try to roll back the approval of Bitcoin futures ETFs, but that would entail unwinding products that already have hundreds of millions of dollars invested in them.
It would still seem the easiest path, both practically and politically, is for the agency to eventually allow spot Bitcoin ETFs to come to market.
“The odds of the SEC rejecting the application this time are limited because the court’s decision was so firmly worded, and we believe it knows it would lose again in court if it did deny the application,” wrote analysts for Compass Point Research & Trading in a research note on Wednesday.
There are risks in buying GBTC. Without also shorting the token itself, buying the fund means taking on not just the risk the discount won’t close soon but the risk Bitcoin itself drops for other reasons. Already the token trades at about the level it was at before the court decision, continuing a malaise that has lasted for months. While investors wait, they have to pay GBTC’s high annual fee of 2% of assets under management.
“I do see the discount narrowing, but that does not mean underlying spot won’t fall by 20% over some period of time,” said James Elbaor, founder of Marlton LLC, which manages a hedge fund focused on closed-end funds.
Elbaor in the past ran an activist campaign that tried to force Grayscale’s management to hold a tender offer for shares, and argues there is a risk Grayscale won’t take the necessary steps for GBTC to convert.
“There is a world where BlackRock gets approved and Grayscale has an investor unfriendly filing that gets denied by the SEC,” said Elbaor, whose fund doesn’t currently own GBTC.
A Grayscale spokeswoman said, “Unwaveringly, we remain 100% committed to converting GBTC to an ETF.”
The GBTC discount also isn’t what it once was. Early this year, the discount was near 50%. During oral arguments in the Grayscale case, the judges strongly tipped they were leaning against the SEC, and the surprise applications for Bitcoin ETFs from BlackRock and others squeezed the discount even further.
But a 20% discount still seems high.
“Eventually this will happen. It’s just a matter of when,” McClurg said.
Write to Joe Light at [email protected]
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