Grayscale’s Vision for Bitcoin

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Analysts say the so-called GBTC discount could widen if Grayscale’s plan for a spot-bitcoin-based ETF fails to win SEC approval.



Grayscale, the world’s largest digital asset manager, says it will continue to seek regulatory approval for a bitcoin exchange-traded fund (ETF) backed by actual units of the cryptocurrency, even as Securities and Exchange Commission (SEC) Chairman Gary Gensler says he would prefer to approve an ETF backed by bitcoin futures contracts.

Some analysts predict that the Grayscale Bitcoin Trust (GBTC), whose shares already trade in public stock markets, has no chance of winning approval anytime soon for its current plan to convert the $30 billion trust into an ETF backed by the cryptocurrency.

The related speculation is that investor demand for GBTC shares could erode if the SEC approves competing proposals for a bitcoin ETF, such as a recent flurry of filings pegged to the futures market. (Grayscale is a unit of Digital Currency Group, of which is an independent subsidiary.)

One possibility is that the so-called GBTC discount could widen if the predictions prove accurate. This discount represents the difference between the per-share value of the bitcoin held by GBTC and the share price as traded in public markets. Generally speaking, the lower the demand, the wider the discount.

The discount to the fund’s net-asset value is currently near 15%, though in May it widened to 20%. For most of last year and into early 2021, the shares traded at a premium to the net asset value. But investor demand for the vehicle as the bitcoin market entered a downtrend starting in March, and as bitcoin ETFs were approved in Canada and elsewhere. The SEC has yet to approve any bitcoin ETFs.

“Risks may be enhanced if fees for the new ETFs are half of GBTC’s 2%,” according to Bloomberg Intelligence analysts James Seyffart and Eric Balchunas.

Grayscale is still banking on the possibility that the SEC is open to a spot bitcoin ETF. “Spot” refers to “spot markets,” or in this case the mostly unregulated exchange-based and over-the-counter markets where traders swap bitcoin. That’s contrasted with the bitcoin futures contracts traded on regulated exchanges like the Chicago-based CME.

“We are not sitting back with our feet up,” David LaValle, Grayscale’s head of ETFs, said in an interview. “Gensler’s comments have not changed our business strategy, and we will utilize and leverage an ETF wrapper to bring other products to market such as traditional equity-based ETF.”

As for GBTC, “when we’re able to convert into ETF, that discount will collapse, and we look forward to that opportunity,” LaValle said.

But some analysts say that opportunity might be in the distant future, arguing that a bitcoin futures ETF will be approved by the SEC before a spot ETF.

“Converting funds from structure to structure is hard, requiring significant operational and legal work,” Dave Nadig, director of research atwrote in a blog post. “I actually think that puts GBTC at the back of the line, not the front.”

It’s not so simple Grayscale’s LaValle noted in the interview that a futures-based bitcoin ETF comes with complexities. With futures trading, there’s an additional layer of financial structuring; futures contracts are considered to be derivatives of the original, underlying assets; an oil futures contract is not the same as directly trading a barrel of oil.

“A futures-based ETF, BTC or otherwise, is a more complex, expensive cost structure, with operational hurdles that can impact the return stream,” LaValle said.

Meanwhile, other asset managers are trying to get a bitcoin futures ETF across the finish line.

On Tuesday, the rival digital-asset manager Bitwise submitted an application to the SEC for its Bitcoin Strategy ETF, under the Investment Company Act of 1940.

“The Fund will not invest directly in bitcoin,” the filing said. “The Fund intends to obtain exposure to bitcoin primarily through indirect investments in standardized, cash-settled bitcoin futures contracts traded on commodity exchanges” that are registered with the U.S. Commodity Futures Trading Commission.

“A spot bitcoin ETF would be a better solution for most investors than a futures-based bitcoin ETF,” Bitwise chief investment officer Matt Hougan told in an email. “It would be simpler, lower-cost, and easier to understand. But a futures-based bitcoin ETF is better than no ETF at all.”

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