Among the interesting aspects of the recent fallout from the slew of spot Bitcoin ETF filings is the impact it has had on the controversial Grayscale Bitcoin Trust (GBTC). The trust has been flying, up 56% in the three weeks since Blackrock’s ETF filing was announced, significantly outperforming its underlying asset, Bitcoin, which has risen 21%. This has led to a narrowing of the trust’s discount to net asset value to its lowest mark since September, now below 30%.
The underlying issue here is the closed-fund nature of GBTC. There is no way to get Bitcoin out, coupled with steep fees (2% annually), meaning a heavy discount has persisted. This is a black mark on the sector, and investors should not consider buying unless there is no other vehicle through which to gain Bitcoin exposure.
The outsized assets under management in GBTC – essentially trapped due to the closed-fund nature – feels like a throwback to the days when anyone and everyone wanted to get exposure to Bitcoin through whatever means necessary. Grayscale had a monopolistic power, and this, coupled with the demand for Bitcoin, meant it even traded at a premium for much of its early history.
However, as more mediums through which Bitcoin exposure can be had have come online, the premium has flipped to a discount, and that discount has become large. Investment management firm Osprey Funds has a similar product, and earlier this year they sued Grayscale, alleging that its competitor misled investors about how likely it was that GBTC would be converted into an ETF.
Grayscale has tried and failed for years to convert the vehicle into an ETF. Last year, it even sued the SEC itself, declaring the latest rejection “arbitrary”. This event is typical in a lot of ways of the travails the space has had in bridging the gap to become a respected mainstream financial asset.
My thoughts on the trust overall remain the same. It represents a terrible investment, and its very existence is only a byproduct of the regulatory travails that the sector has struggled with. There is no reason to even consider buying this unless there is quite literally no other vehicle through which to gain Bitcoin exposure.
Spot ETFs are a question of when rather than if, and when these investment vehicles come online, GBTC will likely become a thing of the past. This won’t assuage the frustration of existing GBTC investors, who have been caught badly as alternative Bitcoin investment vehicles have come online and demand for the trust has dried up.
The entire GBTC debacle represents the mess that is the institutional regulatory climate in the US. There will come a day when all this squabbling over trusts and ETFs will likely be nothing but a throwback of a more uncertain time. But until then, investors should be aware of the risks that come with investing in GBTC.
