Home CryptoMarket Grayscale Bitcoin Trust trades at a record 36.7% discount, but is it justified?

Grayscale Bitcoin Trust trades at a record 36.7% discount, but is it justified?

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US investors have been waiting for Bitcoin (BTC) exchange-traded fund (ETF) approval since May 2014When the Winklevoss Bitcoin Trust filed an amendment request with the U.S. Securities and Exchange Commission (SEC).

Over the years, the SEC has rejected all applicants. The latest rejection came against WisdomTree’s spot Bitcoin ETF application on October 11th. , deter fraud and market manipulation, violations of foreign exchange rules and applicable federal securities laws and regulations. ”

Bitcoin mutual funds have been around since 2013, but are limited to accredited investors. The launch of his spot-based BTC ETF opens the market to retail investors and a wider range of mutual funds in the industry.

At the moment, US regulators are reluctant to release what many believe to be a fairer and more transparent product for Bitcoin. However, the exact same instruments have long been available for bonds, global currencies, gold, Chinese stocks, real estate, oil and silver.

Grayscale Bitcoin Trust (GBTC), a $12.3 billion investment fund, is currently trading at a record 36.7% discount to its bitcoin holdings, a type of “buy dip”. It may not be a discount. The gap began after the Toronto Stock Exchange launched his February 2021 spot investment product, the Purpose Bitcoin ETF.

What is an exchange-traded trust?

An ETF is a security type that holds a variety of underlying investments such as commodities, stocks and bonds. ETFs may resemble mutual funds as they are pooled and managed by the issuer.

SPY, an ETF that tracks the S&P 500 Index, is the most famous example of this product. The mutual fund is now managed by State Street, where he has $328 billion in assets under management.

More exotic structures such as ProShares UltraShort Bloomberg Crude Oil (SCO) are also available. The fund uses derivatives and aims to provide short leverage of 2x per day against oil prices. So investors are effectively betting on lower oil prices.

Purchasing an ETF gives the investor direct ownership of its contents and is subject to different taxation events than holding a futures contract or leveraged position.

Trust funds like GBTC do not offer redemption or conversion rights.

Mutual funds are outside the jurisdiction of the SEC and are actually regulated by the US Office of the Comptroller of the Currency.

Grayscale’s GBTC is the absolute leader in the cryptocurrency market despite being structured as a company, at least in regulatory form. Mutual funds are considered closed-end funds and have a limited number of shares available.

As a result, GBTC shares are not freely created and no redemption program is offered. This inefficiency creates large price discrepancies against the fund’s underlying Bitcoin holdings. In contrast, ETFs allow market makers to create and redeem shares, which in most cases offer minimal premiums or discounts.

The Purpose Bitcoin ETF (BTCC.U), for example, held a book value of $3.59 per share on Oct. 13, with shares closing at $3.60 on the Toronto Stock Exchange. Similarly, the US derivative, the ProShares Bitcoin Strategy ETF (BITO), had an underlying price of $11.94 on Oct. 13, while its shares traded at $11.95.

RELATED: Grayscale Fires First Salvo When It Opposes SEC Over Bitcoin ETF Rejection

Grayscale is battling the SEC, but results could take years

In June 2022, asset manager Grayscale filed a lawsuit against the SEC regarding the conversion of GBTC into a spot-based Bitcoin ETF. The company is awaiting final decisions from regulators since filing in October 2021.

Donald B. Verilli, senior legal strategist at Grayscale, said the SEC’s denial was “arbitrary” in that it “failed to apply consistent treatment to similar investment vehicles.” As a result, the asset manager filed a legal challenge based on the SEC’s alleged violations of the Administrative Procedures Act and the Securities Exchange Act.

It should be noted that it has been eight and a half years since the first request for the Bitcoin Spot ETF Registry was filed. At present, GBTC charges a fixed annual administrative fee of 2%, so the 36.7% discount is justified given that the SEC continues to deny appeals and demands from all fund managers. There is a possibility.

Inherently, mutual fund products are far less optimal than ETFs and so far Grayscale has done little to minimize the impact on GBTC holders.