Investor Insights: Is BTC On Sale Through GBTC? 

Key Points

• Shares of Grayscale’s Bitcoin Trust (GBTC) are currently trading at [~35%] discount to their underlying Bitcoin value.
• Buying shares of GBTC could be akin to buying Bitcoin at ~65 cents on the dollar, but there are several things that need to happen for that to actuallybe the case.
• Recent filings for spot bitcoin ETFs already reduced the product’s discount and could continue to be bullish for GBTC price.

Buying anything ~65 cents on the dollar sounds too good to be true. When it comes to buying shares of GBTC, that could indeed be the case. But it could also not be the case. Let’s unpack why.

What is GBTC?

It’s a passive investment fund that holds BItcoin (BTC). It currently holds ~630K BTC (~3.2% of all BTC in circulation). That translates to ~$16.5B worth of BTC at current prices. That’s a lot of “orange coin”. All the BTC in GBTC is held at Coinbase Custody - a regulated and insured custodian. Milk Man doesn't lose sleep thinking about Coinbase Custody going belly up.

Unironically, its shares trade under the ticker “GBTC”. They can be purchased directly through brokerage platforms like Robinhood, Fidelity, and Charles Schwab. Lastly, it’s a registered security. Its issuer, Grayscale Investments, files GBTC’s financial statements with the US SEC on a quarterly basis. You can find them on Grayscale’s website.

Pretty straightforward, right? So, why the heck is GBTC trading at a discount?

No Redemptions -> Discounts/Premiums

(Most) passive investment funds, like exchange traded funds (ETFs), allow investors to redeem fund shares for the underlying assets held in the fund.

Take State Street’s SPY fund, for example. It’s a giant ETF with ~$400B in assets under management. It’s designed to track the performance of the S&P 500 index. So, as one could guess, the SPY fund holds (pretty much) all of the stocks that are included in the S&P 500. Because SPY is an ETF, (big) investors can trade in their SPY shares for the underlying stocks that the fund holds (in this case, shares of the ~500 companies in the S&P 500 index).

Why would an investor want to do this? Consider a situation where, for whatever reason, SPY shares are trading at a price that is lower than the value of the stocks that each share is entitled to. (Smart) investors would continuously buy the cheap SPY shares, redeem them for the stocks in the fund, sell those stocks, and pocket the difference. The lower the price of SPY shares relative to the value of the stocks in the fund, the bigger the profit. Some sweet ole fashioned arbitrage, frens.

Because of this redemption “escape valve” the price of ETF shares closely tracks the value of the assets in the fund. Take a look at the chart below. It shows the premium/discount that SPY shares have traded at relative to the value of the stocks the fund holds. Over the past 5 years, the largest recorded premium for the fund has been ~0.30% while the largest recorded discount has been ~0.80%.

In other words, because the line in the chart above is relatively flat, we know that shares of SPY trade very close to the value of the underlying stocks. No SPY discounts, sorry y’all.

What Makes GBTC Different From SPY

GBTC is not an ETF. So, Grayscale does not allow redemptions of GBTC shares for underlying BTC. Sure, you could go to Grayscale’s office in Stamford Connecticut with GBTC shares in hand and demand your BTC back. But chances are you’d eventually be escorted off the property.

The only reason BTC comes out of GBTC is to pay Grayscale its fees for managing the fund.

With no “escape valve”, the price of GBTC has, let’s just say, “not tracked the price of Bitcoin very well”. Because investor’s can’t trade in their shares for underlying BTC, the price of those shares is not just influenced by GBTC price. It’s also determined by the supply and demand of those GBTC shares on the secondary market.

As we know, supply and demand can fluctuate ... a lot.

In the case of GBTC, these swings in supply and demand have caused GBTC shares to trade at a premium as high as 130% and a discount as low as 49% to underlying value.

Think about it this way. In late 2017, people paid as much as ~$2.30 to get their hands on $1.00 worth of BTC held in GBTC. Today, they are only willing to pay $0.65 to get their hands on that same $1.00 of BTC. Crazy ... We know.

How this supply and demand imbalance became so pronounced is a story for another day. The better question to ask is, “could today’s discount be eliminated”?. If it were eliminated tomorrow, buying shares of GBTC today would actually be like buying Bitcoin at 65 cents on the dollar. In other words, the blue bar in the chart below (GBTC share price) would rise to the same level of the gray bar (BTC holdings per GBTC share).

Wen No More Discount?

There a three possible scenarios which would (eventually) eliminate or drastically reduce GBTC’s discount:

1. Grayscale gets approval to convert GBTC to a spot Bitcoin ETF
2. Grayscale does not get ETF approval, but conducts a tender offer for GBTC shares
3. Another asset manager gets approval for to launch a spot Bitcoin ETF

Could GBTC Actually Be Converted To A Spot Bitcoin ETF?

It was not all that surprising when Grayscale’s initial application to convert GBTC to a spot Bitcoin ETF was rejected by the SEC in June 2022. It was also not surprising when, right away, Grayscale sued the SEC for denying their application on grounds that it was an “arbitrary and capricious” decision. (woah those are some big words)

What is surprising is that it sounds like Grayscale could actually win its lawsuit against the SEC. Analysts from Bloomberg Intelligence are putting Grayscale’s chance of victory around ~70%. Wow. Now, that sounds promising. But even if Grayscale wins, there is still a chance that the SEC could “drag its feet” and come up with other reasons to not give them the green light to convert GBTC to an ETF.

James Seyffart, Bloomberg Intelligence

What Happens If GBTC Doesn’t Get ETF Approval?

If GBTC is not approved to convert to an ETF, Grayscale CEO Michael Sonnenshein has stated that the firm will explore other options to return capital to GBTC shareholders. The most obvious of these “options” would be a tender offer. That would entail Grayscale going out into the market and buying up some GBTC shares in an effort to close the discount.

Just how many shares? “No more than 20%” of outstanding GBTC shares is how far Grayscale has stated they will go. How much could that cause the discount to narrow? At this point it’s hard to say. But one could safely say that a tender offer should not make the discount go deeper into the red.

Now, many are claiming that Grayscale could also just offer redemptions today through something called Regulation M. Whether or not that is actually true, is a subject of debate. But even if Grayscale could (theoretically) offer redemptions, they would probably never actually do so on their own accord. Why?

In just the last ~14 months, Grayscale has raked in an estimated ~$350M in management fees on GBTC alone.

If Grayscale were to offer redemptions, chances are a lot of people would take them up on that offer. BTC would leave the trust. And Grayscale’s cash cow would go “bye bye”.

What Happens If A Different Bitcoin ETF Is Approved?

Over the last few weeks, the narrative around spot Bitcoin ETFs has gained steam, to say the least. BlackRock, WisdomTree, and Invesco all submitted applications to the SEC to launch spot Bitcoin ETFs. (I guess everyone hasn’t just pivoted to AI?)

The jury is still out on whether or not any of these will actuallyget approved. But even the mere existence of these applications has breathed some new life into GBTC. Its discount narrowed by ~8% from ~44% to 36% just on the news of these filings happening. If one of these other ETFs does actually get approved, GBTC’s discount would likely narrow significantly. It would only be a matter of time before GBTC also got the green light.

The Waiting Game

Clearly, there are a couple of different ways that GBTC’s discount couldnarrow further and boost the share price of GBTC. But how long it could take remains “the million dollar question”. For those playing the waiting game, there are three things to keep in mind:

1. BTC performance will impact GBTC returns
2. Holding GBTC is expensive
3. Liquidity for GBTC shares is very low

BTC performance will impact GBTC returns

All eyes are currently on GBTC’s discount. But let’s not forget that owning shares of GBTC is also (kind of) the same thing as owning BTC. Sure, the price of GBTC shares will be impacted by movement of the discount. But it will also be impacted by the price of BTC. If BTC moves a lot in one direction or the other, your bet on a discount converging could be more of just a bet on the price of BTC.

In other words, if you’re not bullish on BTC, it’s probably best to stay away from GBTC altogether.

Holding GBTC is Expensive

If you read the fine print of GBTC’s financial statements you’ll notice that Grayscale charges a 2.0% fee on the assets held in GBTC. For a passively managed fund, that’s steep. But hold on …. it gets worse.

That 2.0% fee is charged on the value of the BTCheld in the trust - not the value of GBTC shares. So, when shares are trading at a ~35% discount, those fees are actually ~3.1% on the value of shares. That means GBTC’s fees are ~33X higher than the fees you’d pay for holding SPY. (how is that even legal?)

Unsurprisingly, people are pretty “unhappy” about this. GBTC shareholders Fir Tree Capital and Alameda Research (yup, that Alameda Research) are suing Grayscale on account of high fees and lack of redemptions. With no redemptions, they (and all other GBTC holders) are caught between a rock and a hard place:

• Option A: Sell GBTC shares at 65 cents on the dollar
• Option B: Pay ~3.0% management fees and say a prayer that the discount eventually narrows

Liquidity Of GBTC Share Is Low

Finally, things could change quickly as it relates to GBTC. Volume for GBTC shares has fallen off a cliff ever since it started trading at a discount.

Throughout 2023, very little GBTC has been traded. Unless liquidity improves meaningfully, all signs point to relatively small buy and sell orders having a relatively large impact on GBTC’s share price.

In other words, “announcements of announcements” about spot Bitcoin ETFS will probably be enough to push GBTC’s price (and its discount) meaningfully in one direction or the other over the coming months.