Time is running out on this limited time offer to get Bitcoin for cheap. Whether this deal turns out to be a bargain or a dud depends on the actions of a recalcitrant regulator.
By steven erlichForbes Staff and Nina Bambishevaforbes staff
AMore than two years after inadvertently offering a way to buy Bitcoin at a price below its market value (sometimes much below), the world’s most popular cryptocurrency investment fund is moving to try to change its format. – Provide investors with overnight bonuses thanks to court victories. Logically, the question should be when the $16 billion Grayscale Bitcoin Trust (GBTC) will transition from its current restrictive format to an exchange-traded fund. But it’s not entirely clear that the U.S. Securities and Exchange Commission is ready to abandon the position that stands in the way of that change.
Right now, GBTC units trade at $19.26 but stake a claim on $23.33 worth of Bitcoin. The trust, similar to a closed-end mutual fund, can change hands above or below its net-asset value (NAV), allowing investors to charge a premium or discount to the value of their holdings. This design allows institutional and wealthy individual investors to buy fund shares at NAV, and in previous years it provided a perverse incentive to trade at a premium that reached 100% and remained close for most of 2019 to 2021. 30% was spent on. ,
After a six-month period, NAV buyers can sell shares to retail investors in over-the-counter trading at massive premiums, leading to a lack of ways for individuals to invest in Bitcoin without exposure to hackers and crypto wallets. Shows the complexity of. Irreplaceable passwords. Sellers then use their profits to buy more GBTC at the face Bitcoin price and do the entire process again. rinse and repeat. Sophisticated traders can also protect their downside by shorting Bitcoin in the futures market. Meanwhile, Grayscale collects an annual management fee of about 2%.
GBTC has traded at a deep discount since the beginning of 2021
GBTC’s discount narrowed following a favorable judicial ruling in August, but it still remains at 17%.
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The premium continued until February 2021, when it suddenly disappeared after a spot Bitcoin ETF appeared in Canada, quickly reaching a discount of 17% in May, according to Y Charts. This attracted the attention of Forbes investment columnist William Baldwin, who suggested in July that year that investors who thought Grayscale might decide to seek ETF status for the trust, and the SEC might be liable to grant it. Yes, they should be loaded on GBTC. , Additionally, he wrote, buyers can protect themselves from Bitcoin downdrafts by shorting the cryptocurrency in the futures market.
That advice still makes sense today, but the discount is still 17%, but it hasn’t cleared its path here. As a series of crypto-related bankruptcies in 2022, which peaked with the failure of FTX in November, wiped out two-thirds of the value of digital currencies, discounts swelled to nearly 50%.
Grayscale, part of Barry Silbert’s Digital Currency Group, decided to apply for ETF status in October 2021. If permitted, this will have the immediate effect of bringing the trading price in line with the NAV. Like trusts, ETFs also have a group of large investors who transact directly with the fund, but they can also buy and sell the underlying asset—Bitcoin in the case of GBTC—on demand. If the trading price falls fractionally below NAV they will be able to redeem their shares for Bitcoin and if a premium develops the fund will be forced to give them shares in exchange for the cryptocurrency. That mechanism ensures that the NAV does not stray too far from the market value of the ETF’s portfolio.
At the current discount, buying GBTC today would be like paying eightpence plus threepence to the US Treasury and receiving a clean $1 bill in return after conversion. But for that to happen, the SEC would have to approve the concept of an ETF based on the spot-market price of Bitcoin, which it has consistently refused to do, since Cameron and Tyler, founders of the Gemini crypto exchange, pitched for the new fund. More than 30 applications have been rejected. The Winklevosses first applied for one in July 2013.
The SEC rejected Grayscale’s application in June 2022 on the same grounds as proposals for more than 30 spot bitcoin ETFs: a belief that neither the fund’s sponsor nor the equity exchange on which it sought to list them was had planned, could have prevented fraud and manipulation. Cash market for cryptocurrencies. While this concern is justified, the agency has allowed several ETFs based on Bitcoin futures contracts to trade on the regulated Chicago Mercantile Exchange, the world’s largest commodity exchange. In an act of regulatory cognitive dissonance, the SEC is ignoring the fact that no matter how clean the trading in those contracts is, if the underlying Bitcoin spot price is being manipulated that will certainly be reflected in the futures.
The lack of stability led Grayscale to sue the regulator in October 2022, claiming it was violating the Federal Administrative Procedure Act by favoring futures-based funds without any logical reason.
A three-judge panel of the U.S. Court of Appeals for the District of Columbia agreed with Grayscale. In surprisingly concise language, Judge Neomi Rao rejected Grayscale’s application by the SEC on August 29, writing on behalf of the unanimous panel that the decision was “arbitrary and capricious.” The remaining 21 pages of the decision were to systematically dismantle each argument the SEC used to approve a Bitcoin futures ETF, all but rejecting one based on the spot market.
The ruling encouraged Bitcoin bulls, especially after major asset managers including BlackRock, Fidelity and Invesco had filed for new spot ETFs of their own in recent weeks, albeit ostensibly with the new monitoring regime in place. This was intended to overcome SEC objections. Bitcoin rose 7% after the decision and the GBTC discount dropped from 29% to 17%, but the SEC, which has been waging a battle against the cryptocurrency market with increasing enthusiasm this year, said on September 1 that it would not consider the applications. Will do. By mid-October. This took some of the momentum off Bitcoin, causing the price to drop to $25,926 as of yesterday, but GBTC’s discount remained steady at 17%, a sign that investors think it’s more likely that the trust will be liquidated than previously thought. Will be given ETF status. Before the court’s decision.
More likely, but probably not inevitable.
For one thing, the annulment decision doesn’t mean the SEC has to approve the Grayscale application; He just has to give a logical explanation as to why he won’t allow spot ETFs, but believes futures-based funds are fine.
The agency can also appeal and has until mid-October to do so. Its intentions remain unclear. “We are in uncharted waters,” says Greg Zeithlis, general counsel and chief compliance officer at MultiCoin Capital, who worked on the initial Winklevoss ETF application. “As far as precedent for this situation, there is no procedural precedent, or to my knowledge, no history.”
Grayscale is not waiting for the appeal period to end. It sent a letter to the SEC last week asking the agency to move immediately toward listing GBTC as an ETF, arguing that the deadline to reject the application has expired. The SEC typically has 240 days to approve or deny an application, a period that will expire in mid-2022. “We do not think there is any other reason for the Commission to refuse to convert GBTC into a spot Bitcoin ETF,” says. Grayscale’s chief legal officer Craig Salm suggested that the agency should have provided additional reasoning in its denial. Still, Grayscale finds itself hamstrung by the time the appeal period expires, and regulators could even provide another explanation for rejecting the application — or, in the nuclear option, revoke the futures ETF’s ability to trade. Is – although both strategies seem unlikely.
The clock matters a lot in this instance. David Martin, head of institutional coverage at crypto prime broker FalconX, said that even if investors believe they can make a 17% profit in GBTC over the long term, if it takes more than a few months It may not be worthwhile. Additionally, given the uncertainty regarding the GBTC application, it is unclear whether the restructured fund will be able to hit the market before the new ETF applies for launch. Such a situation may play havoc with the GBTC exemption.
Being first in the world of crypto ETFs means a lot. ProShares launched the first Bitcoin futures ETF in November 2021, and it dominates over 90% of the market despite similar products going live shortly thereafter. Michael Sapir, CEO of ProShares, said of his company’s success in the market, “Being first matters and liquidity breeds liquidity.”
Perhaps Grayscale’s size will protect it—after all it still holds $16.2 billion worth of Bitcoin that can’t leave this crypto hotel California until redemption is available. “Don’t underestimate the power of power,” says Hector McNeil, co-CEO and founder of London-based HANetf, which helps asset managers build exchange-traded funds. (Grayscale sponsors an ETF that’s publicly traded.) Provides exposure to companies operating in the digital asset industry such as Coinbase and many Bitcoin mining companies.) Additionally, Grayscale may choose to take further court action.
There are at least a few people within the SEC who think now is the right time for the regulator to approve ETFs, first among them is Commissioner Hester Pearce, a Republican known in the industry as ‘Crypto Mom’ And those who have expressed disagreement over many of the rejections. , “I think anyone working with the SEC on Bitcoin exchange-traded products is probably banging their head against the wall, because every time they come across the goalposts, they move,” Pierce pointed out. forbes In July. “The standards being used here are different than the standards that are used for similar products, and it’s really hard not to see this as a Bitcoin Spot specific thing.”
However, until GBTC is able to be converted into an ETF, investors are playing a tense waiting game by holding onto discounted coupons for the leading cryptocurrency and hoping that they can cash out their winnings before too long.
