Grayscale GBTC: Low-Hanging Fruit for Bitcoin Investment

The world’s largest Bitcoin fund product, Grayscale Bitcoin Trust (GBTC), hasn’t traded at a premium to its underlying asset, Bitcoin (BTC), since February 2021. At times, GBTC’s discount to Bitcoin was as “bad” as nearly -50%. Bashing and ridiculing GBTC has turned into a favourite pastime of many analysts and fund managers. At the end of the day, why invest in GBTC and not directly in Bitcoin? However, right now, the giant $18 billion product might just be the most effective way to superior returns and achieving alpha from Bitcoin investment for hedge funds and retail investors.

GBTC – Product Details and History

GBTC was launched as an investment trust product by Grayscale Investments in September 2013. It was one of the earliest Bitcoin investment products, and over the years, GBTC has amassed an industry-leading $18.2 billion in AUM. For years, Grayscale has been trying to turn GBTC into an ETF product but has so far failed to receive the required approval from the Securities and Exchange Commission (SEC).

As a result, being a trust product, GBTC trades only over-the-counter (OTC). GBTC’s underlying asset is the Bitcoin cryptocurrency, and it tracks the CoinDesk Bitcoin Price Index (XBX) as its benchmark index. The product has a management fee of 2% and a $50,000 minimum investment requirement.

On the back of the enthusiasm for early Bitcoin-based fund products, GBTC experienced solid demand from institutional investors and traded at a premium to Bitcoin until February 2021. During all those years, there was an expectation from many corners of the investment world that Grayscale would receive the SEC’s approval for converting GBTC into an ETF.

Grayscale first applied to the SEC for GBTC’s ETF approval in 2016. The application turned into a multi-year saga, with the SEC and Grayscale going back and forth in their discussions. In mid-2022, the SEC finally rejected the company’s application. Grayscale vowed at the time to continue its efforts to eventually claw out the coveted ETF designation.

Premium Turns to Discount

As doubts over the product’s ETF approval started to mount in 2020 and 2021, demand for GBTC relative to direct Bitcoin investments declined. In late February 2021, GBTC turned from premium to discount relative to Bitcoin’s price for the first time in its history.

The discount kept widening, reaching -29% in June last year. At that time, the SEC announced its official rejection of GBTC’s ETF application, which led to further tanking of the demand for GBTC shares. By December, the discount had widened to -49%.

This year has been more positive for GBTC, with the discount narrowing to -27% on the back of renewed hopes for a future ETF approval. Earlier this year, a number of prominent traditional investment funds, including the giants Fidelity and BlackRock, submitted their applications for Bitcoin spot ETFs to the SEC. If the regulator approves these applications, Grayscale will undoubtedly have a strong case for having another go at getting GBTC registered as an ETF.

Why GBTC Is Low-Hanging Fruit for Bitcoin Investment

Many in the investment world have focused their attention and critical commentary on GBTC’s double-digit discount rates to Bitcoin in the last couple of years. Why bother with an investment product whose discount rates clearly indicate a lack of demand? Why even pay Grayscale the 2% management fee when one could simply invest directly in Bitcoin?

The major reason why GBTC currently shapes up as a winner is that, unlike Bitcoin, the trust has a significant upward potential factor – a possible approval for an ETF from the SEC. If the SEC approves the recent Bitcoin ETF applications from Fidelity, BlackRock, and a host of other prominent fund managers, Grayscale will have all the reasons to grab the SEC by the collar and ask – “Why not me?”.

Avalanche of Bitcoin ETF Applications at SEC

When the SEC rejected Grayscale’s bid last year, the leading fund managers in the industry were not seeking crypto ETF approvals en masse – this is a development of the last few months. In the past, select fund managers at various times (unsuccessfully) tried to get their Bitcoin ETFs approved. However, the recent rush of applications is unprecedented. The SEC currently has on its desk Bitcoin ETF applications from Fidelity, BlackRock, WisdomTree Funds, Invesco, VanEck, Galaxy Digital, ARK Investment, and BitWise.

While the SEC is known for its anti-crypto stance – we would even describe it as the world’s most powerful “institutional crypto hater” – it will be hard for the regulator to roundly reject what the bulk of the investment world already considers to be a legitimate investment vehicle – Bitcoin ETFs. At least, the SEC will now need good reasons to reject all that battery of applications. The reality is that it will be hard for the regulator to come up with such reasons.

These developments point to Grayscale having sound chances of finally getting GBTC approved as an ETF. If this materialises, expect the demand for GBTC shares to rise markedly. This would shorten the current discount, perhaps even put GBTC at a premium again.

Does It Matter That GBTC Is at Discount?

For investors, GBTC’s large, double-digit discounts matter very little with regard to the product’s profit potential. If you buy GBTC shares when they are at a -30% discount to Bitcoin and sell when the discount rate shortens to -20%, you’ve made some handsome profit. This, of course, assumes no dramatic declines in Bitcoin’s own price.

Moreover, the larger discount rates mean that GBTC investors can capitalise on these rates shortening even if Bitcoin declines somewhat. In contrast, short discount rates will make GBTC more sensitive to any potential Bitcoin price dips.

While Bitcoin itself currently has no major fundamental factor pointing to a significant upward move in the future, GBTC certainly does, and that factor is the potential for an ETF approval from the SEC. Some in the investment world might have already sensed the potential - since mid-June, GBTC discount rates have been shortening relentlessly.

In mid-June, GBTC’s discount rates stood at -44%. They are now at -27%. Further significant shortening might soon blunt GBTC’s profit potential. However, with the wide discounts still available today, GBTC might be the low-hanging fruit for crypto investors. Suddenly, the answer to the question “Why bother with GBTC when there’s Bitcoin?” no longer sounds as straightforward as it once did.