Translation: LianGuaiBitpushNews Mary Liu
The Grayscale Bitcoin Trust (GBTC), with a market value of nearly $14 billion, is a focus in the field of cryptocurrency investment. Over the past two years, the trading price of the fund has been increasingly larger compared to the value of the Bitcoin it holds. However, there has been a significant change in recent weeks, boosting investor confidence.
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Martin Leinweber, the digital asset product strategist at MarketVector Index, said in an interview with CoinDesk: “When the discount narrows, it means that investors have more confidence in the trust or the demand for the stock is increasing. If the discount narrows significantly or disappears completely, investors’ returns could be substantial.”
So why is there a discount, why is this important, and why is the discount narrowing?
Understanding the structure of the trust is crucial in answering these questions. GBTC is a closed-end fund (CEF), different from the rapidly popular exchange-traded funds (ETFs) in recent years. Both are essentially vaults that hold a large amount of assets, whether it’s stocks or the billions of dollars worth of Bitcoin held by Grayscale Trust.
However, ETFs have a mechanism that ensures their value closely aligns with the value of the assets they hold, with the help of professional trading firms known as authorized participants. If an ETF holds $10 billion worth of stocks but its market value reaches $12 billion, these traders can create new shares of the ETF. This allows them to profit from the premium while also pushing the price of the ETF down to the value of the ETF holdings. The intermediary fund company is rewarded for improving the efficiency of the ETF.
On the contrary, if the price of an ETF falls to a discount – for example, if its market value drops to $8 billion while its assets are worth $10 billion – these traders can redeem the shares, profit from the difference again, and bring the price and assets back to parity.
Grayscale hopes to convert GBTC into an ETF, but the U.S. Securities and Exchange Commission (SEC) has rejected this proposal. Grayscale has filed a lawsuit seeking to overturn the decision. In the meantime, as a closed-end fund (CEF), it lacks the arbitrage mechanism that ETFs have to prevent price spirals.
Since February 2021, the trading price of GBTC has been consistently lower than the value of the Bitcoin it holds. The situation worsened significantly after the FTX incident last year. In November, Genesis’ loan department suspended client withdrawals, and the GBTC discount surged to 43%. The exact reason for Genesis’ predicament damaging GBTC is unclear, although some theories suggest that many trading firms are clients of Genesis, and some of them may have bet on the narrowing of the discount. The loss of funds could hinder these trading strategies.
After the SEC reaffirmed its rejection of Grayscale’s application to convert the trust into an ETF, the GBTC discount deepened to a record 50% in December.
Why has the discount narrowed significantly in recent weeks to its lowest level since the beginning of 2022?
The most popular topic in the crypto field right now is whether US regulatory agencies will ultimately approve a spot Bitcoin ETF. Currently, the regulatory agencies only allow ETFs that hold Bitcoin futures contracts. Traditional financial giant BlackRock has recently invested heavily in promoting this initiative. Given its influence as the world’s largest asset management company in Washington, DC, this has generated great optimism among people, believing that a spot Bitcoin ETF may be not far from being listed. Other large mutual fund management companies such as Fidelity have also applied for Bitcoin ETFs.
Analysts say that the possibility of the US SEC approving the conversion of GBTC to an ETF is one reason for the discount narrowing. Grayscale stated in April that it expects to find out by the end of the third quarter whether it is allowed to convert GBTC to an ETF.
Leinbewer said, “The catalyst for the current narrowing of the GBTC discount may be the ongoing legal discussions surrounding the possibility of GBTC converting to an ETF. The market seems to be reacting to these discussions, and the expectation of a potential legal victory for GBTC may drive increased demand for the stock. The discount is seen as an implied probability of conversion to an ETF. The lower the discount, the higher the likelihood of a market price increase.”
James Seyffart, an ETF analyst at Bloomberg Intelligence, said regarding Grayscale’s lawsuit against the SEC that he expects this decision to be favorable for Grayscale. “But this will only send GBTC’s ETF conversion request back to the SEC for approval of GBTC’s conversion or rejection for different reasons. This hope for conversion may be the reason for the narrowing of the discount.”
Seyffart added, “We don’t know how long it will take for the SEC to approve these products. This wave of applications may lead to this situation (we believe the current likelihood of approval for Grayscale is 50/50, but if it is rejected again, it may take several years). We also don’t know how long it will take for Grayscale to convert GBTC once it is approved.”
What will happen if GBTC is converted to an ETF?
Seyffart said that recently, large US institutions have been applying for approval of spot Bitcoin ETFs, which has given people great hope for Grayscale’s potential to convert GBTC to an ETF.
He said that the conversion of GBTC to an ETF is only a matter of time. Seyffart said, “Once converted to an ETF, due to the flexibility of the ETF structure, GBTC will no longer trade at a significant discount or premium.”
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