The Grayscale Bitcoin Trust (GBTC) is a $14 billion market-cap product that has become a giant in crypto investing. In recent weeks, the fund has traded at a narrowing discount to the value of the bitcoin it holds, which could lead to a substantial return for investors. Martin Leinweber, a digital asset product strategist at MarketVector Index, said, If the discount narrows significantly or disappears completely, it could lead to a substantial return for investors.
Unlike exchange-traded funds (ETFs), GBTC is a closed-end fund (CEF). ETFs have a feature that ensures authorized participants can help keep their value closely in line with the value of the assets they hold. If an ETF owns $10 billion worth of stocks, but fetches $12 billion in market capitalization, these traders can create new shares of the ETF. This allows them to make money due to the premium and also drives the ETF’s price down toward the value of the ETF’s holdings.
Grayscale wants to turn GBTC into an ETF, though the U.S. Securities and Exchange Commission (SEC) has rejected that. Grayscale has sued to overturn that decision. In the meantime, as a CEF, it lacks the arbitrage mechanism ETFs use to keep prices from getting out of whack.
The GBTC discount deepened to a record 50% in December after the SEC reiterated its reasons for denying Grayscale’s application to convert the trust into an ETF. James Seyffart, an ETF analyst at Bloomberg Intelligence, said, The catalyst for the current narrowing of the GBTC discount could be the ongoing legal discussions around the possibility of GBTC converting to an ETF. The market appears to be responding to these discussions and the anticipation of a potential legal victory for GBTC could be driving increased demand for the shares.
The recent flurry of applications from large institutions for bitcoin spot ETF approvals in the U.S., has generated a lot of hope for Grayscale’s potential to convert GBTC into an ETF. Seyffart said, It is only a matter of time before GBTC gets converted into an ETF. Once converted to an ETF, GBTC would not trade at meaningful discounts or premiums anymore due to the efficiencies of the ETF structure.