In a sign of the depths of the bear market, the Grayscale Bitcoin Trust, a bellwether security that has long provided investors with an easy way to bet on the No. 1 cryptocurrency, is trading at an all-time discount.
Known as GBTC, the security is trading at a price 36.3% less than the spot price of Bitcoin, according to data provided by its issuer, Grayscale. While this may seem like an opportunity to get Bitcoin exposure at a discount, there is no way to redeem GBTC shares for actual Bitcoin, so investors can’t be guaranteed the gap with the market price will close.
Legal Fight
It used to be the opposite. GBTC has traded at a premium for most of its life, with its price in secondary markets rising as much as 132.5% higher than its net asset value, according to YCharts. But that was when institutions had limited options for investing in Bitcoin. That has changed and there are now more ways than ever to buy Bitcoin-like securities, including via the Canadian Bitcoin ETF, BTCC, and the Bitcoin futures ETF, which was approved last year.
GBTC, which has $12B under management, has fallen 47% in the last 12 months.
The discount comes as Grayscale, a pioneer in fashioning crypto products for traditional capital markets, is pursuing a legal fight against the U.S. Securities and Exchange Commission for denying its bid to convert the trust into an exchange-traded fund.
In an 86-page order released on June 29, the SEC said it was disapproving the application because it failed to show investors would be protected from “fraudulent and manipulative acts and practices.”
The decision was a blow for Grayscale and GBTC holders because a spot ETF for Bitcoin would essentially trade at par with the token and erase the discount, making the security far more useful for investors. The company immediately filed a challenge to the order in the U.S. Court of Appeals in Washington.
“We are deeply disappointed by and vehemently disagree with the SEC’s decision to continue to deny spot Bitcoin ETFs from coming to the U.S. market,” said Michael Sonnenshein, Grayscale’s CEO, in a statement on June 29.
Long Running Litigation
Taking on a regulator in court is no mean feat for financial institutions. Yet Grayscale may be buoyed by the SEC’s series of defeats in its long running litigation with Ripple Labs, the company that uses a token called XRP to execute cross-border payments.
In 2020, the SEC sued Ripple and top executives for issuing XRP as an unregistered security, a case that was meant to establish that cryptocurrencies should be treated the same as stocks, bonds, or investment contracts.
But Ripple has won a series of procedural decisions, including a ruling in April that the SEC cannot edit thousands of emails it was required to disclose as part of the lawsuit. Ripple plans on using content in the emails to argue that the regulator has been inconsistent in its application of securities laws to cryptocurrencies.
But is the ETF rejection actually bad news for Grayscale? Maybe not, says Ryan Selkis, the co-founder and CEO of Messari, the data intelligence outfit. In his latest research piece, Selkis argues Grayscale is able to charge a 2% fee for managing the GBTC trust, but that wouldn’t be justified if the product was an ETF, which often have no fees at all.
Selkis says in his research that a winning ETF case for Grayscale would cut its revenue by over 50%.
Discount Rate
Specifically and according to Grayscale’s data, one share of GBTC cost $12.06 at market close on June 30 while the fraction of a Bitcoin that share represents was worth $17.41.
Depending on who you ask (YCharts shows an all-time low of 34.08% coming on June 17), that’s a record low for the premium-turned-discount rate.
Whether the discount rate hit a true all-time low may be splitting hairs however — the big picture is that GBTC’s discount rate to the underlying BTC has trended in one direction for the past five years — down.
GBTC’s discount has been widening in 2022. Source: YCharts
The discount is all the more painful because as recently as 2018, GBTC was trading at over a 60% premium to the underlying Bitcoin. So while GBTC was hitting what were then all-time highs of $29 a share in late 2017 and Bitcoin was in the high teens, now with Bitcoin at similar levels, GBTC has dropped well over 50% to $12 a share as the premium collapsed.
The End of the “Grayscale Trade”
While GBTC’s premium was positive, the security provided an excellent opportunity to accredited investors who could buy GBTC for Bitcoin at NAV value in private placements. After a six-month lockup, those investors could sell the GBTC on the open market and pocket the premium.
This was essentially a risk-free trade, until the premium turned into a discount. This left investors who were waiting for the lockup to end to sell their GBTC, out to dry, as the premium they expected was replaced by a discount. So ended “the Grayscale Trade.”
Some may be betting that an ETF does happen, which would make the discount a buying opportunity before GBTC comes to match the BTC it represents. Selkis even said GBTC shareholders could sue Grayscale and redeem their GBTC for the amount of BTC it actually represents.
But the ETF may never happen — GBTC could theoretically continue to trend down while BTC chops at current levels (And Grayscale continues to charge 2% on the total value of the Bitcoin in the trust, not GBTC!).
With a legal battle between Grayscale and the SEC underway, it may actually be GBTC holders which continue to suffer the most as the discount continues to deepen.
