The World’s Largest Bitcoin Fund Is On Sale. Its Discount Could Be a Value Trap.

n closed-end funds, anything trading around 70 cents on the dollar might seem too good to pass up. Investors can get that kind of bargain now in the Grayscale Bitcoin Trust. But this may be a case where a discount isn’t really worth the price.

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The Grayscale Bitcoin Trust (ticker: GBTC) is the largest publicly traded Bitcoin fund in the world with more than 700,000 investors and $24.1 billion in assets. It’s a private-placement trust that trades like a stock over the counter. It’s also one of the few ways that investors in a publicly traded equity can gain direct exposure to Bitcoin, rather than through futures contracts–the mechanism for exchange-traded funds like the ProShares Bitcoin Strategy ETF (BITO).

GBTC has become a favorite way for institutional fund managers to gain exposure to crypto. Ark Invest, run by Cathie Wood, owns 7.9 million shares of GBTC in Ark Next Generation Internet ETF (ARKW), worth about $200 million. Morgan Stanley owned more than 13 million shares of GBTC across 17 portfolios at the end of 2021, according to regulatory filings analyzed by Blockworks. At recent prices for GBTC, Morgan’s Stanley’s stake was worth around $320 million.

GBTC trades at a deep discount to its underlying Bitcoin holdings, or net asset value. At Monday’s closing price of $24.67, the trust traded at a 29% discount to its NAV of $34.84 a share.

If GBTC were to trade in line with its NAV, investors in the fund would see a 41% gain in the value of their holdings–regardless of Bitcoin’s underlying moves.

One way that discount could close would be if regulators allowed Grayscale to convert the trust into an ETF. Grayscale has been trying for years to convince the Securities and Exchange Commission to approve such a conversion. Following the SEC’s approval of a futures-based ETF last October, Grayscale re-submitted an application to convert GBTC into an ETF.

“The conversion to an ETF is the best way for the product to track its underlying assets,” said Craig Salm, chief legal officer for Grayscale Investments, in an interview.

Yet the SEC, under Democratic chairman Gary Gensler, has shown scant inclination to approve a spot-based Bitcoin fund. Several other fund companies have failed to win approval under his watch, including Fidelity, SkyBridge, WisdomTree, Valkyrie, and VanEck.

The SEC didn’t respond to a request for comment.

Grayscale argues that since the SEC approved a futures-based product, it should give a spot-based ETF the greenlight. The firm’s lawyers wrote a letter to the SEC in November, arguing that the agency would “unfairly discriminate” against Grayscale if it rejected its application.

By approving a futures ETF but denying a spot ETF, the SEC would be “treating two similar investment products differently,” said Salm. “We look forward to engaging with the SEC on that.”

Yet some ETF experts say Grayscale is likely running into a wall at the SEC under Gensler. “I don’t buy this argument that somehow the SEC has broken securities laws and should approve Grayscale’s conversion before other Bitcoin trusts are approved,” said Dave Nadig, chief investment officer and director of research of ETF Trends.

He points out that other fund companies are seeking approvals for new ETFs. Converting a trust into an ETF could require a change of its listing exchange, new trading counterparties, and thorny regulatory approvals. “It’s the difference between moving into an entirely new house or packing up your old house and unwinding it before getting into the new one,” he says.

And the political climate isn’t favorable under a Democratic administration. Democrats have been leveling criticism at the crypto industry in Congressional hearings, and Gensler has signaled he’s far more likely to issue tougher rules on crypto than sign off on the first spot Bitcoin ETF.

“It’s not anywhere near the top of the SEC’s agenda,” says Nadig. “They allowed a futures product as a relief valve for the fund industry, but I don’t see any movement to a spot ETF in the next year or two.”

Without converting to an ETF, the only mechanism for GBTC’s discount to narrow would be market demand: buyers of the trust pushing up its price closer to the NAV.

Grayscale’s parent company, Digital Currency Group, recently authorized $250 million in share buybacks across its nine publicly traded trusts. But that isn’t close to moving the needle on GBTC.

Ordinarily, a 29% discount would lure activist hedge funds to pressure a fund sponsor into a tender offer–forcing the sponsor to buy back shares at close to the NAV. However, as Barron’s has reported, Grayscale’s corporate bylaws make it tough, if not impossible, for hedge funds to mount such a proxy campaign.

“There’s no mechanism for anyone to arbitrage the discount in GBTC away,” says Nadig.

Investors looking for Bitcoin exposure can buy it directly, of course, without paying ongoing fund fee–a 2% expense ratio in Grayscale’s case or 0.95% for the ProShares Bitcoin futures ETF.

Paying 71 cents for a dollar’s worth of Bitcoin does look attractive. But investors may not recoup that 29 cents for some time.

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