Why is the GBTC discount narrowing and what impact does it have?
Source: Coindesk
Translation: Mary Liu, BitpushNews
Grayscale Bitcoin Trust (GBTC), with a market value of nearly $14 billion, is the focus of the cryptocurrency investment field. Over the past two years, the trading price of the fund has become increasingly larger compared to its holding value of Bitcoin. However, there has been a significant change in recent weeks that has boosted investor confidence.
Martin Leinweber, the digital asset product strategist at MarketVector Index, said in an interview with CoinDesk: "When the discount narrows, it indicates that investors have increasing confidence in the trust or that there is an increasing demand for the stock. If the discount narrows significantly or disappears completely, investors may see substantial returns."
So, why is there a discount? Why is this 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), which is different from the rapidly popular exchange-traded funds (ETFs) in recent years. Both of them are essentially vaults that hold a large amount of assets, whether they are stocks or the billions of dollars' worth of Bitcoin held by Grayscale trust.
However, ETFs have a feature that ensures their value remains closely aligned with the value of the assets they hold, with the help of professional trading firms called authorized participants. If an ETF holds $10 billion worth of stocks, but its market value reaches $12 billion, the traders can create new shares of the ETF. This allows them to profit from the premium while also driving down the price of the ETF to the value of the assets held by the ETF; the intermediary fund company is rewarded for improving the efficiency of the ETF.
In contrast, if the price of an ETF falls to a discount, such as its market value dropping to $8 billion while its assets are valued at $10 billion, these traders can redeem their shares and profit from the difference, pushing the price and assets back to parity.
Grayscale hoped to convert GBTC into an ETF, but the U.S. Securities and Exchange Commission (SEC) rejected the proposal. Grayscale has filed a lawsuit seeking to overturn this decision. Meanwhile, as a closed-end fund (CEF), it lacks the arbitrage mechanism that ETFs have to prevent price dislocation.
Since February 2021, the trading price of GBTC has been consistently lower than its holdings of Bitcoin. The situation worsened significantly after the FTX incident last year. In November, Genesis' lending department stopped client withdrawals, and the GBTC discount increased to 43%. The exact reasons why Genesis' predicament has harmed GBTC are still unclear, although some theories suggest that many trading firms were clients of Genesis, and some may have been betting on the discount narrowing, and the loss of funds might hinder these trading strategies.
After the SEC reiterates its rejection of Grayscale's application to convert the trust into an ETF, GBTC's discount reached a record 50% in December.
Why did the discount significantly narrow in recent weeks, reaching its lowest level since early 2022?
The hottest topic in the cryptocurrency field right now is whether US regulatory agencies will eventually approve a spot Bitcoin ETF. Currently, regulatory agencies only allow ETFs that hold Bitcoin futures contracts. Traditional finance giant BlackRock has recently invested heavily in pushing for this initiative. Given its influence as the world's largest asset management company in Washington, D.C., this has sparked great optimism that a spot Bitcoin ETF may be on the horizon. Other major mutual fund management companies such as Fidelity have also applied for a Bitcoin ETF.
Analysts say that the possibility of SEC approval to convert GBTC into an ETF is one reason for the discount narrowing. Grayscale stated in April that they expected to find out by the end of the third quarter whether the conversion of GBTC to an ETF would be allowed.
Leinbewer said, "The catalyst for the current narrowing of the GBTC discount may be the ongoing legal discussions around the possibility of converting GBTC into an ETF. The market appears 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 implicit probability of conversion to an ETF. The lower the discount, the higher the likelihood of a market price increase."
James Seyffart, an ETF analyst at Bloomberg Intelligence, commented on Grayscale's lawsuit against the SEC, stating that he expects this decision to be favorable for Grayscale. "But this will only send GBTC's ETF conversion request back to the SEC for approval or denial for different reasons. The hope for this conversion may be the reason for the narrowing of the 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 happening (we believe there is a 50/50 chance that Grayscale currently gets approval, but if it gets rejected again, it may take years). We also don't know how long it will take for Grayscale to convert GBTC once it receives approval."
What will happen if GBTC converts into an ETF?
Seyffart said that recently, large US institutions have been applying for approval of a Bitcoin spot ETF, which has raised high hopes for Grayscale's potential to convert GBTC into an ETF.
He stated that converting GBTC to an ETF is only a matter of time. Seyffart said, "Once converted into an ETF, GBTC will no longer trade at a significant discount or premium due to the flexibility of the ETF structure."
