The potential transformation of the Grayscale Bitcoin Trust into an Exchange Traded Fund (ETF) might set off a selling wave of up to $18 billion worth of Bitcoin.
The introduction of a spot-oriented Bitcoin ETF could make Bitcoin more palatable and accessible for everyday investors and mutual funds. In addition, unlike its futures-oriented counterpart, a spot Bitcoin ETF involves the actual purchase of Bitcoin.
However, the question arises: will the nod of approval for the first-ever Bitcoin ETF ignite a bullish rally? It isn’t as straightforward as it seems.
Continuing GBTC ‘Discount’ in Double Figures
To date, the U.S. Securities and Exchange Commission (SEC) has turned down every Bitcoin ETF application, including the recent refusal to the VanEck Bitcoin Trust on March 10, 2023.
The SEC reasoned that the proposal lacked a “holistic surveillance-sharing agreement with a substantial, regulated market linked to spot Bitcoin.” As a result, regulators are wary of introducing what is perceived as a more equitable and transparent Bitcoin product.
Investors are now contemplating whether the recent proposals from ARK Invest and BlackRock to initiate spot Bitcoin ETFs might offer a resolution to Grayscale’s Bitcoin Trust (GBTC), an investment instrument that trades on the stock exchange.
Intriguingly, following BlackRock’s ETF filing announcement, the GBTC “premium” spiked to its highest levels in months.
However, while the initial approval of a spot Bitcoin ETF might suggest a bullish shift, it could lead to a bearish BTC price outcome, especially in the short term.
Demystifying an ETF
Primarily, an ETF is a type of security encompassing an array of underlying investments, such as commodities, stocks, and bonds. Its workings may resemble a mutual fund, with the issuer managing and pooling the included assets.
The renowned SPDR S&P 500 ETF Trust, which mirrors the S&P 500 index with State Street governing the fund’s $436 billion assets, serves as a good example of an ETF.
ETF ownership confers to the investor direct possession of the fund’s components, leading to unique tax implications when compared to holding futures contracts or leveraged positions. While Bitcoin spot ETFs face continuous rejections, similar products for various asset classes have existed in the market for several decades.
Reasoning a 30% GBTC Discount
Currently, the Grayscale Bitcoin Trust — an investment fund managing $18.4 billion assets — trades at a -30% discount compared to its Bitcoin holdings. The deviation between the market value of their 626,778 Bitcoin and the GBTC shares trading on traditional stock exchanges hit a low of -49% in December 2022.
This discrepancy can be seen as justifiable due to the lack of arbitrage mechanisms within the fund. Grayscale’s GBTC, while being a closed-end fund — implying a finite number of shares — holds a dominant position in the cryptocurrency market.
GBTC shares can neither be freely created nor redeemed, resulting in significant price differentials when compared to the fund’s real Bitcoin holdings. On the other hand, an ETF provides the market maker with the ability to issue and redeem shares, ensuring that the premium or discount remains minimal.
Considering GBTC imposes a 2% annual administrative fee, the discount might be deemed acceptable in light of the SEC’s repeated rejection of appeals and requests from fund managers.
Conversely, ETFs typically trade at par with net assets, unlike GBTC. For instance, the Purpose Bitcoin ETF (BTCC.U) had a $5.63 net asset value per share on June 27, and the shares closed at $5.65 on the Toronto Stock Exchange.
Could a Spot Bitcoin ETF Approval Create Pressure on BTC?
The Grayscale Bitcoin Trust, while being a less attractive instrument than an ETF, has made few efforts to lessen the impact on GBTC investors. However, market optimism slightly improved following BlackRock’s move to file a Bitcoin spot price ETF.
If the SEC grants Grayscale the green light to transition its GBTC Trust into a legitimate Bitcoin ETF, it could bring about arbitrage opportunities and share redemptions. In this situation, a considerable influx of BTC could flood the market as investors can exit their position at par.
The main question is: how much of that $18 billion will flow into other Bitcoin-related instruments or be sold on exchanges?
Regardless of the specifics, the approval of a spot Bitcoin ETF might trigger a significant selling pressure due to Grayscale’s GBTC conversion, as BTC locked for three to eight years re-enters the market.