The advent of a spot-based Bitcoin exchange-traded fund (ETF) holds the promise of enhanced accessibility for individual investors and mutual funds. Unlike futures-based Bitcoin ETFs, a spot-based ETF involves the actual acquisition of Bitcoin. However, the question remains: will the approval of the first Bitcoin ETF truly have a bullish impact? Not necessarily.
GBTC ‘Discount’ Persists:
Throughout the years, the United States Securities and Exchange Commission (SEC) has consistently rejected every Bitcoin ETF applicant, with the most recent denial being issued to the VanEck Bitcoin Trust on March 10, 2023. The SEC’s conclusion centered on the absence of a “comprehensive surveillance-sharing agreement with a regulated market of significant size related to spot Bitcoin.” Regulatory authorities remain cautious about releasing what many perceive as a fairer and more transparent Bitcoin product.
Consequently, investors are now contemplating whether the recent proposals from ARK Invest and BlackRock, aimed at launching spot Bitcoin ETFs, could offer a solution for Grayscale’s Bitcoin Trust (GBTC). GBTC, an investment vehicle with shares traded on the stock exchange, experienced a surge in its premium following BlackRock’s ETF filing.
Nonetheless, while the potential approval of a spot Bitcoin ETF may appear initially bullish, its short-term consequences for the Bitcoin price may be adverse.
Exploring the Nature of ETFs
Before delving further, it is crucial to understand the concept of an ETF. Essentially, an ETF is a type of security that holds diverse underlying investments, such as commodities, stocks, and bonds. The ETF functions similarly to a mutual fund, with its issuer pooling and managing the underlying assets. A well-known example of this instrument is the SPDR S&P 500 ETF Trust, which tracks the S&P 500 index. Managed by State Street, the mutual fund boasts a substantial $436 billion worth of assets.
Purchasing an ETF grants investors direct ownership of the fund’s contents, resulting in different tax implications compared to holding futures contracts or leveraged positions. While Bitcoin spot ETFs continue to face rejections, similar products have been available for several decades for bonds, global currencies, gold, Chinese equities, real estate, and oil.
The Likely Justification of the 30% GBTC Discount
The Grayscale Bitcoin Trust, boasting $18.4 billion in assets under management, is currently trading at a substantial 30% discount compared to its Bitcoin holdings. This disparity between the trust’s 626,778 Bitcoin at market value and the GBTC shares traded on regular stock exchanges reached a low point of -49% in December 2022.
Consequently, this discount is likely justified, considering the absence of arbitrage tools. Despite being classified as a closed-end fund, Grayscale’s GBTC reigns supreme in the cryptocurrency market. However, the limited number of available shares and the absence of a redemption plan contribute to significant price discrepancies in relation to the fund’s actual Bitcoin holdings. In contrast, an ETF empowers market makers to issue and redeem shares, ensuring minimal premiums or discounts.
GBTC charges an annual administrative fee of 2%, making the discount acceptable given the SEC’s consistent rejection of appeals from fund managers.
In contrast, ETFs typically trade in alignment with their net assets, unlike GBTC. For instance, the Purpose Bitcoin ETF (BTCC.U) held a net asset value per share of $5.63 on June 27, with the shares closing at $5.65 on the Toronto Stock Exchange. Similarly, the U.S. derivatives ProShares Bitcoin Strategy ETF had an underlying price of $16.89 on June 28, while its shares traded at the same value.
Potential Pressure on BTC upon Spot Bitcoin ETF Approval
Comparatively, an investment trust product is considerably less desirable than an ETF, and Grayscale has made little effort to mitigate its impact on GBTC investors thus far. However, market sentiment experienced a modest improvement following the announcement by BlackRock, the world’s largest asset manager, regarding its intent to launch a Bitcoin spot price ETF.
The eventual elimination of the discount between GBTC’s share price and its contents is contingent on the SEC granting Grayscale permission to convert its GBTC Trust into an authentic Bitcoin ETF. In such a scenario, significant BTC quantities may flood the market as investors gain the ability to exit their positions at par.
The only lingering question pertains to the extent to which the $18 billion will flow into other Bitcoin-related instruments or be sold on exchanges. Regardless, it is highly likely that the approval of a spot Bitcoin ETF will generate substantial sell-pressure as the BTC, previously locked for three to eight years, re-enters the market.
