Why does Grayscale BTC (GBTC) trade at a discount?

Main topic: Tech

Other topics: Bitcoin, Crypto

Short answer:

• Because it can't be redeemed like an ETF.
• And investors are pricing in the risk on the SEC never approving its conversion to ETF.

Grayscale BTC is an unredeemable trust, not a redeemable ETF

An ETF is an investment product with the following qualities:

1. Its shares trade like a stock on a national securities exchange, such as NYSE Arca or Nasdaq
2. It includes a simultaneous share creation/redemption mechanism that allows the shares to trade at the Net Asset Value (NAV) of its holdings via arbitrage.
3. Market participants called authorized participants (APs) – essentially brokers or dealers like banks and trading firms – can create shares of the ETF when shares trade at a premium or redeem shares from the ETF when shares trade at a discount, earning a profit.

The Grayscale Bitcoin Trust is a traditional financial product that allows institutional investors to gain exposure to bitcoin. GBTC is an investment trust that owns over 3.4% of all Bitcoin currently in circulation. As of February 2022, each share of GBTC was backed by 0.00092896 actual Bitcoin. GBTC shares do not own anything other than Bitcoin, nor do the shares employ leverage or the use of derivatives such as Bitcoin Futures contracts. The underlying Bitcoin tokens are held in secure offline storage. In addition to managing the custody relationship, Grayscale oversees day-to-day administration, communications with regulators, reporting, financial statements, and other features of familiar publicly traded investment vehicles.

An ETF’s shares would be registered with the SEC under the Securities Act of 1933, which contrasts with how GBTC shares have historically been offered: through a private placement process that is exempt from registration under the ‘33 Act pursuant to Rule 506(c) of Regulation D, and therefore makes them initially only available to accredited investors and subject to a six month holding period. GBTC shares today are also not redeemable.

US regulators have denied Grayscale Investments LLC’s bid to convert the world’s biggest crypto trust into an exchange-traded fund. The proposal to list the ETF did not meet the standard designed to prevent fraudulent and manipulative practices and protect investors and the public interest, the Securities and Exchange Commission (SEC) said in a filing. Grayscale proposed creating the ETF as a conversion of its Grayscale Bitcoin Trust.

It charges a 2% management fee, meaning investors discount it, given the indefinite delay in SEC approval of ETF conversion

Shares of the Grayscale Bitcoin Trust (GBTC) have continued to slide, trading at a discount of 33.75% to the spot price of Bitcoin—a new all-time low since its inception in 2017. GBTC is a financial vehicle that enables investors to trade shares in trusts that hold pools of Bitcoin, with each share meant to track the current price of Bitcoin; the idea is that investors can gain exposure to Bitcoin without having to actually buy and hold the asset itself.

A key crypto market metric known as the "Grayscale discount" is widening after the U.S. Securities and Exchange Commission rejected an application to convert the world's biggest bitcoin fund into an exchange-traded fund (ETF). The shares of the Grayscale Bitcoin Trust (GBTC) are now trading at a 31% discount to the value of the underlying bitcoin, based on figures posted on the website for Grayscale Investments, the fund's manager. Prior to the SEC's decision, the GBTC discount was 28.4%.

However, since February 2021, shares in GBTC have traded at a discount, meaning that GBTC trades for far less than the net value of the Bitcoin held by Grayscale to back the trust.

Because GBTC has a six-month lockup period, holders are running at a loss, since they can only cash in by selling their GBTC shares. Grayscale believes that the only way to correct GBTC’s ever-growing discount is to convert the trust into a spot Bitcoin ETF, arguing that it is “in the best interests of investors.” Converting the trust into an ETF would enable it to charge lower management fees, and make it easier to move money in and out of the fund.

The 2% fee could lead to extreme depreciation, if the SEC never approves the ETF

ETFs track the market data or value of the underlying asset much more closely than a trust. Hence, the market price per Bitcoin ETF share is relatively close to the actual value of BTC.

Since GBTC charges a 2% management fee and sometimes also a premium. That significantly increases the price of a GBTC share as compared to the market price of BTC while spot buying, or while buying shares of a Bitcoin ETF. The value of a GBTC share hasn’t been growing at the same rate as its underlying asset. Even if you don’t have to pay a premium, you still won’t earn as much profit by buying shares as you will by owning Bitcoin directly. From 2020 to 2021, GBTC’s share price increased by approximately 220% in value while BTC surged by nearly 340%.