Bitcoin Trust is trading in grayscale at a record high at a discount of 36.7%, but is it justified?

Bitcoin Trust is trading in grayscale at a record high at a discount of 36.7%, but is it justified?

US investors have been waiting for the approval of the Bitcoin Exchange Traded Fund (BTC) since May 2014when the Winklevoss Bitcoin Trust filed an amendment request with the US Securities and Exchange Commission (SEC).

Over the years, the Securities and Exchange Commission (SEC) has rejected every applicant, and the latest rejection of WisdomTree’s application for a Bitcoin ETF was issued on October 11. and deter fraud and market manipulation, as well as violations of exchange rules and applicable federal securities laws and rules.”

Trust tools for investing in Bitcoin have existed since 2013, but they have been limited to accredited investors. The launch of the BTC ETF on a spot basis will open up the market to retail investors and a broader range of mutual funds in the industry.

At the moment, US regulators are reluctant to release what many believe will be a more fair and transparent product for Bitcoin. The conflicting reality is that while spot BTC ETFs continue to be rejected, the same product has long been available for bonds, global currencies, gold, Chinese stocks, real estate, oil and silver.

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

What is an exchange-traded fund?

An ETF is a type of security that holds various underlying investments, including commodities, stocks or bonds. An ETF may resemble a mutual fund because it is pooled and managed by its issuer.

SPY, the ETF that tracks the S&P 500 index, is the most outstanding example of this tool. The mutual fund is currently managed by the State Street Corporation and holds $328 billion in assets under management.

More exotic structures are also available, such as ProShares UltraShort Bloomberg Crude Oil (SCO). This fund uses derivatives and aims to offer twice the daily short leverage on oil prices, which means investors are effectively betting on a decline in oil prices.

Buying an ETF gives the investor direct ownership of its contents, which creates various tax events against futures contract and financial positions.

Trusts such as GBTC do not offer redemption or transfer rights

Investment trust funds are outside the jurisdiction of the Securities and Exchange Commission and are actually regulated by the Office of the Comptroller of the Currency in the United States.

Grayscale’s GBTC is the absolute leader in the cryptocurrency market, although it is regulated as a company – at least in a regulatory form. An investment fund is considered a closed-end fund, which means that the number of shares available is limited.

Thus, GBTC shares are not created freely, nor do they offer a redemption program. This inefficiency leads to large price discrepancies against the fund’s underlying bitcoin holdings. In contrast, an ETF allows a market maker to create and redeem shares, ensuring that the premium or discount is minimal most of the time.

For example, the Purpose Bitcoin ETF (BTCC.U) held a net asset value of $3.59 per share on October 13, and shares closed at $3.60 on the Toronto Stock Exchange. Similarly, the base price of the US derivative ProShares Bitcoin Strategy ETF (BITO) reached $11.94 on October 13, while its shares were trading at $11.95.

Related: Grayscale Fires First Shot in Case Against SEC Over Rejection of Bitcoin ETF

Grayscale is fighting the SEC, but results could take years

In June 2022, asset manager Grayscale initiated a lawsuit against the SEC over converting GBTC into an ETF based on Bitcoin. The company has been waiting for a final decision from the regulator since submitting its application in October 2021.

Grayscale’s chief legal strategist, Donald P. Ferrelli, stated that the SEC’s rejection was “arbitrary” in “the failure to enforce consistent treatment of similar investment vehicles.” As a result, the asset manager filed a lawsuit based on the SEC’s alleged violation of the Administrative Procedure Act and the Securities Act.

It should be noted that eight and a half years have passed since the first application for the Bitcoin spot ETF was submitted. Currently, GBTC charges a flat management fee of 2% per year, so the 36.7% discount may be justified as the SEC continues to reject appeals and requests from every fund manager.

In essence, the investment trust product is far less ideal than an ETF, and so far, Grayscale has done little to reduce the impact on GBTC holders.