Eoneren
Grayscale Investments LLC got a green light from a federal court to launch the first Bitcoin exchange-traded fund in the US, a watershed moment in the cryptocurrency industry’s quest to tap billions of dollars from everyday investors.
–Bloomberg News, on today’s GBTC ruling.
After a lengthy court battle, the U.S. Court of Appeals ruled 3-0 in favor of Grayscale Investments’ suit to vacate the SEC’s denial of Grayscale Bitcoin Trust (OTC:GBTC) becoming an ETF. You can read the full ruling here. It’s late August and much of the world is on vacation, but this is a huge ruling.
This likely means that investors like you and me will shortly be able to invest in ETFs that track the spot price of Bitcoin (BTC-USD), just as we can with other assets like gold and silver. It also means that the billions of dollars of trapped value hidden inside Grayscale’s discount to net asset value could soon be unlocked. BlackRock (BLK) and Fidelity have also filed for spot Bitcoin ETFs, which will bring much-needed price competition to the market. As of my writing this, Bitcoin is up roughly 7% on the day with the news, while GBTC is up about 17%.
I have friends who lost tens of thousands of dollars to high-profile crypto scammers and theft, and had there been an ETF, they would still have their money! I was among the people who filed public comments on GBTC, and I believe that a low-cost, regulated ETF framework for investing in BTC is a godsend. The ruling is a huge step forward for the crypto world to move on from its Wild West beginnings and towards being an asset class on par with gold and silver as a store of value. I own some GBTC and the trade was a multi-year headache, so it’s good to see this soon coming to a favorable conclusion.
What Was Grayscale Bitcoin’s Suit About?
Grayscale Investments is a crypto investment company based near New York City. They’re best known for the Grayscale Bitcoin Trust, which is a closed-end fund that allows investors to get exposure to Bitcoin. To be fair, Grayscale isn’t exactly a charity– their Bitcoin fund charges hefty fees (2% annually) and traded at a substantial premium to its net asset value for much of its history. During the early crypto boom, GBTC traded at premiums approaching double its net asset value, which the company exploited by issuing new shares at NAV to private investors with lockups.
Because GBTC charged a lot of fees compared to simply owning Bitcoin, the hype premium eventually turned to a discount to net asset value, which got progressively worse with time. That’s when I started to become interested in the fund as an arbitrage opportunity. Every $100 of Bitcoin in the fund traded at 80 cents on the dollar (it got as bad as almost 50 cents on the dollar at one point). If 2021 was the year of calling in anything and winning, 2022 was the year of every deal getting caught in some kind of court battle. Grayscale attempted to convert the fund into an ETF, which would effectively erase the dead money from the discount. In June 2022, the SEC denied Grayscale, citing worries about market manipulation, which Grayscale then appealed.
This Grayscale trade has been around for over 2 years on the idea that at some point, what’s happening now would happen! Grayscale tried buying back some GBTC, but it didn’t move the needle. Many conspiracy-minded investors (and activists) felt that Grayscale was taking them for a ride to pocket fees. The activists in particular mounted increasing pressure on the company to fix the discount. In the end, Grayscale ended up winning its court battle with the SEC, so the discount will be reduced to zero.
What Does This Mean Going Forward?
Neither the SEC nor Grayscale’s legal team are offering concrete comments yet. However, the 3-0 ruling from the appellate court invalidating the legal arguments against GBTC means that spot Bitcoin ETFs seem inevitable. This is not only for Grayscale but also for BlackRock and Fidelity, who likely had an indication that Grayscale would prevail before they filed spot Bitcoin ETF applications in July.
Grayscale still trades at a roughly 10-15% discount to NAV as of my writing this, so investors willing to wait for the filing to work its way through are likely to be compensated quite well. Bloomberg analysts are reporting that there’s now a 45-day period where both sides can review the ruling. Grayscale’s GBTC will not automatically convert to an ETF because of the court ruling, but it sets in motion a 45-60-day process to get the ETF approved or request an en banc ruling from the appeals court.
Bottom Line
While I hope I’m not jinxing it, the court clearing the narrow technicality that was holding GBTC back overwhelmingly implies to me that Grayscale’s Bitcoin Trust ETF conversion is going to get approved. This should be followed shortly after by Fidelity and BlackRock. This will create a safer framework for investors and advisors looking for exposure to Bitcoin without substantial risk of fraud or theft, and massively broaden the market for Bitcoin. GBTC is a buy pending approval for any meaningful discount to NAV. If Fidelity or BlackRock also succeed in getting Bitcoin ETFs approved that have lower fees than GBTC, then consider switching to them when they’re approved.
Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.
