Why has the significant discount on GBTC gradually narrowed recently?

Why has the GBTC discount narrowed recently?

Source: Coindesk

Translation: LianGuaiBitpushNews Mary Liu

The Grayscale Bitcoin Trust (GBTC), with a market value of nearly $14 billion, is a focus in the cryptocurrency investment field. For more than two years, the trading price of the fund has been increasing compared to the value of the Bitcoin it holds. However, there has been a significant change in the situation in recent weeks, boosting investor confidence.

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Martin Leinweber, a digital asset product strategist at MarketVector Index, said in an interview with CoinDesk, “When the discount narrows, it indicates that investors have more confidence in the trust or that the demand for the stock is increasing. If the discount narrows significantly or disappears completely, investors could see significant returns.”

So why is there a discount, why is it important, and why is the discount narrowing?

Understanding the structure of the trust is crucial in answering these questions. GBTC is a closed-end fund (CEF), different from the rapidly popular exchange-traded funds (ETFs) in recent years. Both are essentially vaults that hold a significant amount of assets, whether it’s stocks or the billions of dollars’ worth of Bitcoin held by Grayscale Trust.

However, ETFs have a mechanism that ensures professional trading firms, known as authorized participants, help maintain the value of the ETF closely aligned with the value of the assets it holds. If an ETF holds $10 billion worth of stocks but its market value reaches $12 billion, these traders can create new shares of the ETF. This allows them to profit from the premium and also pushes the price of the ETF down to the value of the ETF holdings; intermediary fund companies are rewarded for increasing the efficiency of the ETF.

On the contrary, if the price of an ETF falls to a discount – for example, its market value falls to $8 billion while the assets are worth $10 billion – these traders can redeem the shares and profit from the difference, bringing the price and assets back to parity.

Grayscale hopes to convert GBTC into an ETF, but the U.S. Securities and Exchange Commission (SEC) rejected the proposal. Grayscale has filed a lawsuit to overturn the decision. Meanwhile, as a closed-end fund (CEF), it lacks the arbitrage mechanism that ETFs have to prevent price control.

Since February 2021, the trading price of GBTC has been lower than the Bitcoin it holds. The situation worsened after the FTX incident last year. In November, Genesis’ loan department suspended customer withdrawals, and the GBTC discount increased to 43%. The exact reason why Genesis’ troubles harmed GBTC is still unclear, although some theories suggest that many trading firms are Genesis’ clients, and some of them may have bet on the narrowing of the discount. Losing funds could hinder these trading strategies.

After the SEC reiterated the reasons for rejecting Grayscale’s application to convert the trust into an ETF, the GBTC discount deepened to a record 50% in December.

Why has the discount narrowed significantly in recent weeks to reach its lowest level since the beginning of 2022?

The hottest topic in the cryptocurrency field at the moment is whether the US regulatory agencies will ultimately approve a spot Bitcoin ETF. Currently, the regulatory agencies only allow ETFs that hold Bitcoin futures contracts. Traditional financial giant BlackRock has recently invested heavily in promoting this initiative, and given its influence as the world’s largest asset management company in Washington, D.C., this has sparked great optimism among people, believing that the launch of a spot Bitcoin ETF may not be far away. Other large mutual fund management companies such as Fidelity have also applied for Bitcoin ETFs.

Analysts say that the possibility of the US SEC approving the conversion of GBTC to an ETF is one reason for the narrowing discount. Grayscale stated in April that it expects to find out whether the conversion of GBTC to an ETF will be allowed by the end of the third quarter.

Leinbewer said, “A catalyst for the current narrowing discount of GBTC may be the ongoing legal discussions surrounding the possibility of GBTC converting to an ETF. The market seems to be reacting to these discussions, and the expectation of a potential legal victory for GBTC may drive increased demand for the stock. The discount is seen as an implied probability of conversion to an ETF. The lower the discount, the higher the likelihood of a market price increase.”

Bloomberg Intelligence ETF analyst James Seyffart, when discussing Grayscale’s lawsuit against the SEC, said he expects this decision to be favorable for Grayscale. “But this will only send the GBTC ETF conversion request back to the SEC for approval of the conversion or rejection for different reasons. This hope for conversion may be the reason for the narrowing discount.”

Seyffart added, “We don’t know how long it will take for the SEC to approve these products. This wave of applications may result in this situation (we believe there is a 50/50 chance that Grayscale will currently be approved, but if rejected again, it may take several years). We also don’t know how long it will take for Grayscale to convert GBTC once it is approved.”

What will happen if GBTC is converted to an ETF?

Seyffart said that recently, large US institutions have been applying for approval of a spot Bitcoin ETF, which has given people great hope for Grayscale’s potential conversion of GBTC to an ETF.

He said that the conversion of GBTC to an ETF is only a matter of time. Seyffart said, “Once converted to an ETF, GBTC will no longer trade at a significant discount or premium due to the flexibility of the ETF structure.”

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