Torsten Asmus
Preliminary approval of the Bitcoin (BTC-USD) ETF appears imminent. According to sources, the SEC and applicants are currently in the final stages of the initial approval process for several spot Bitcoin ETFs.
The focus was Bitcoin The ETF process took several months and was a major catalyst, driving the price of Bitcoin up about 156% over the last year. This dynamic has not only directly impacted Bitcoin, but has also created a ripple effect that influences the prices of other crypto-vulnerable assets. Stocks from Bitcoin miners, crypto exchanges and Bitcoin-related funds like Grayscale Bitcoin Trust (OTC:GBTC) have all seen significant increases.
Before being brought to the forefront by BlackRock (BLK), Grayscale was initially at the center of the spot Bitcoin ETF application process, as it was the victory in the court case with the SEC that led the SEC to review spot Bitcoin ETFs. This logically makes it likely that GBTC will be among the first wave of spot BTC ETFs approved by the SEC. Sources are confident that approval can happen at any time, and the latest signs that a Bitcoin ETF approval is imminent are the filings from Form 8-A from ETF issuers, including Grayscale.
From premium to discount to par
GBTC discount or premium to NAV (theblock.co)
GBTC's discount to net asset value (“NAV”) has narrowed since crypto market sentiment improved last year. From about -40% discount to NAV a year ago and -20% in October, the current discount is about -7%. As the timeline for approval of a spot Bitcoin ETF approaches and in anticipation that the GBTC fund may receive approval to convert to a spot Bitcoin ETF, the GBTC discount to NAV has continued to narrow. While no one outside the SEC knows exactly when a spot Bitcoin ETF approval will occur or whether multiple spot Bitcoin ETFs will be approved at the same time, there is speculation that Grayscale could be among the first ETFs approved as the company completes the process won the previous ETF application process.
There are likely two scenarios that would play out: one if GBTC receives approval to convert into a spot ETF and the other if it does not receive approval to convert. If the Grayscale Spot Bitcoin ETF is approved in the first wave of approvals, the GBTC price is likely to narrow the entire current discount and be at the level of the NAV as GBTC undergoes a structural change to an ETF and closely tracks the underlying asset becomes price of the asset (Bitcoin). This will provide arbitrage profits to GBTC holders who purchased the shares at a previous discount.
However, if GBTC does not receive approval to convert into a spot Bitcoin ETF, the Trust would maintain its current structure as a closed-end fund and GBTC's discount to net asset value could widen, potentially resulting in a lower market price for GBTC shares would .
Additionally, if other ETFs are approved first, such as BlackRock's before Grayscale's, investors could find the existing closed-end structure of the GBTC fund less desirable compared to a spot ETF, and this could result in a steep discount to the net asset value for Lead GBTC. This increasing discount could result in a lower market price for GBTC shares as supply/demand for the shares could become weak.
The current risk of GBTC's potential premium or deep discount to NAV (depending on the outcome of ETF approvals in the coming days or weeks) warrants some caution. ARK Invest sold its entire remaining GBTC holding last week, purchasing 4.32 million shares or units of the ProShares Bitcoin Strategy ETF (BITO) worth around $100 million. ARK CEO Cathie Wood said the move was made “out of an abundance of caution.”
BITO discount or premium to NAV (YCharts)
BITO currently has a -0.10% discount to NAV and typically maintains a small margin of premium or discount to NAV because it uses Bitcoin futures contracts. By choosing BITO, ARK Invest seems to be aiming for a certain risk reduction. Due to the different structure and operating model of the two funds, BITO's structure provides some risk management compared to holding GBTC (if GBTC does not receive approval to convert into a spot ETF). A key difference in structure is that BITO allows for the creation and redemption of shares by Authorized Participants (APs) in exchange for creation units, which helps keep BITO's market price close to its NAV; while the number of shares of GBTC is fixed and does not allow APs to create or redeem shares.
Bring away
Despite numerous speculations about a preliminary approval of the Bitcoin ETF, uncertainty still exists as no official announcement has been made by regulators. Suppose the spot ETF approvals finally happen and GBTC receives approval to convert into a spot Bitcoin ETF. What early mover advantage will it then have over other ETFs? One possible differentiator I would consider is the expense ratio and fees that are integral parts of the ETF structures.
Fidelity has set its Bitcoin ETF fee at 0.39%, Ark/21Shares has proposed a 0.8% fee in its latest S-1 amendment dated December 28, 2023. Grayscale did not disclose APs or its ETF fee structure in its latest amended ETF application. In my opinion this causes delays in grayscale.
Editor's Note: This article discusses one or more securities that are not traded on a major U.S. exchange. Please note the risks associated with these stocks.
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