This Bitcoin fund has another $7 billion in untapped value. Too bad investors can’t access it.

The world biggest

Bitcoin

Fund is nearing his day in court. At stake in the fight is a $7.2 billion gain that sits like sunken treasure in the fund if only anyone could get to it.

On paper that

Grayscale Bitcoin Trust

(Ticker: GBTC) is the best deal

Bitcoin

you can find. The fund’s share price trades at a 47% discount to its underlying net asset value, or NAV, of $15.4 billion in bitcoin holdings. If it traded up to its NAV, investors could earn an 87% profit without Bitcoin’s price moving. With current prices for the token at around $23,700, the discount is $7.2 billion.

Some investors see this as a bargain. GBTC accounts for more than 5% of Cathie Woods

ARC next generation internet

Exchange Traded Fund (ARKW). “If there’s money to be made by closing the rebate, someone will find a way to make it happen,” says Pat Tschosik, senior portfolio strategist at Ned Davis Research, who sees GBTC could double by mid-year, when bitcoin rises.

But GBTC’s rebate has proven impregnable. The fund’s corporate sponsor, Grayscale Investments, has largely closed itself off from hedge fund proxy campaigns — which would normally attack such a deep discount in a closed-end mutual fund. And GBTC’s rebate has only widened as other bitcoin funds popped up — particularly ETFs like

ProShares Bitcoin Strategy

(BITO), which holds bitcoin futures, for a much lower annual fee.

Grayscale says it wants to convert GBTC into an ETF, arguing it’s the best way to close the discount. ETFs use market arbitrage mechanisms to eliminate discounts to their NAV; In theory, that could free up the $7 billion for GBTC owners.

There’s a catch, however: The Securities and Exchange Commission has repeatedly denied fund company applications for ETFs that want to own Bitcoin directly rather than through futures. In June, the SEC rejected Grayscale’s offer to convert GBTC into an ETF, prompting Grayscale to sue the agency to reverse the decision.

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Hearings are scheduled to begin March 7 in the US Circuit Court of Appeals for the District of Columbia. Grayscale’s lead attorney is Donald Verrilli, who was Attorney General in the Obama administration. Verrilli said in an interview that the SEC has no reason to treat spot bitcoin ETFs any differently than futures-based ETFs, arguing that the agency uses double standards, which violates the law.

“Government agencies have a duty to treat like cases equally, and the SEC violated that duty,” Verrilli says, adding that he doesn’t see a specific parallel in this case. The court could decide by the fall.

The impact goes well beyond GBTC. Legions of mutual fund companies, including Fidelity Investments, VanEck, and WisdomTree (WT), have tried to convince the SEC to approve a spot-based Bitcoin ETF and have been rejected each time.

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A decision allowing GBTC to become an ETF could open the floodgates for far more Bitcoin funds, which the SEC seems reluctant to allow. The agency argues that unlike futures markets, the spot bitcoin market does not have sufficient measures to prevent fraud and manipulation and is not properly monitored. That leaves a spot Bitcoin fund vulnerable to manipulation and puts investors at risk, the agency says.

“All markets for the spot bitcoin underlying Grayscale’s product are unregulated,” the SEC wrote in a letter, arguing that “different treatment was appropriate in the circumstances.” The agency declined to comment.

As lawyers squabble in court, hedge funds and other investors are trying to force Grayscale to give up managing the fund or find other ways to free up the $7 billion.

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Fir Tree Capital Management, a hedge fund manager, sued Grayscale in December, accusing the company of “trust mismanagement.” Fir Tree says Grayscale quietly amended GBTC’s governing documents to make it more difficult for shareholders to adopt the fund. Fir Tree also says that Grayscale’s parent company, Digital Currency Group, has “significant conflicts of interest” that spur it on to maintaining GBTC’s status quo.

Fir Tree and other investors argue that the conflicts stem in part from DCG taking so many fees. ETFs that hold bitcoin futures charge about 1%, compared to GBTC’s 2% annual fee. Because GBTC’s management fees are a percentage of the trust’s assets, they bring in more than $300 million a year at current prices.

“They make a lot of money that way. They need to keep pushing capital to their parent company,” said Steven McClurg, chief investment officer at Valkyrie Investments, which operates a hedge fund that owns GBTC and whose own application to launch a spot bitcoin ETF was denied by the SEC. McClurg says he plans to continue pressuring Grayscale to close the rebate.

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Another company challenging GBTC is Osprey Funds, which operates the Osprey Bitcoin Trust (OBTC), a much smaller fund with $68 million in assets. Osprey has also sued Grayscale, claiming that the company achieved dominance in Bitcoin OTC funds in part by lying about its chances of turning GBTC into an ETF.

Grayscale said the Osprey lawsuit was frivolous and denied the activists’ other complaints. CEO Michael Sonnenshein says he will lower GBTC’s fees once it becomes an ETF.

Another tactic advocated by activists — for Grayscale to return underlying bitcoins to shareholders — would require regulatory approvals similar to those the company is seeking with the ETF conversion, he says. Grayscale says it is open to a takeover bid for up to 20% of GBTC shares if its legal strategy fails, including a possible appeal to the Supreme Court.

Soliciting SEC approval for a takeover bid while Grayscale is suing the agency “is not, in our view, in the best interests of shareholders,” Sonnenshein said.

All of the legal scrambling has left investors in crypto purgatory. A court victory could be a $7 billion windfall, but that could take years if it ever happens. Bitcoin, on the other hand, is up 43% this year. GBTC, whose rebate has widened, is up 39%, once again falling behind the cryptocurrency it is set to track.

write to Joe Light at [email protected]