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07/01/2022

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GBTC Discount Widens to 36% as Legal Fight With SEC Looms

Index Issuer Takes on Feds After Bitcoin ETF Denied

GBTC Discount Widens to 36% as Legal Fight With SEC Looms

In a sign of the depths of the bear market, the Grayscale Bitcoin Trust, a bellwether security that has long provided investors with an easy way to bet on the No. 1 cryptocurrency, is trading at an all-time discount.

Known as GBTC, the security is trading at a price 36.3% less than the spot price of Bitcoin, according to data provided by its issuer, Grayscale. This yawning gap is undermining the attraction of GBTC because investors now have myriad ways to trade Bitcoin at its market price. 

Legal Fight

GBTC, which has $12B under management, has fallen 47% in the last 12 months.

The discount comes as Grayscale, a pioneer in fashioning crypto products for traditional capital markets, is pursuing a legal fight against the U.S. Securities and Exchange Commission for denying its bid to convert the trust into an exchange-traded fund. 

In an 86-page order released on June 29, the SEC said it was disapproving the application because it failed to show investors would be protected from “fraudulent and manipulative acts and practices.”

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The decision was a blow for Grayscale because a spot ETF for Bitcoin would essentially trade at par with the token and erase the discount, making the security far more useful for investors. The company immediately filed a challenge to the order in the U.S. Court of Appeals in Washington.

“We are deeply disappointed by and vehemently disagree with the SEC’s decision to continue to deny spot Bitcoin ETFs from coming to the U.S. market,” said Michael Sonnenshein, Grayscale’s CEO, in a statement on June 29. 

Long Running Litigation

Taking on a regulator in court is no mean feat for financial institutions. Yet Grayscale may be buoyed by the SEC’s series of defeats in its long running litigation with Ripple Labs, the company that uses a token called XRP to execute cross-border payments. 

In 2020, the SEC sued Ripple and top executives for issuing XRP as an unregistered security, a case that was meant to establish that cryptocurrencies should be treated the same as stocks, bonds, or investment contracts.

But Ripple has won a series of procedural decisions, including a ruling in April that the SEC cannot edit thousands of emails it was required to disclose as part of the lawsuit. Ripple plans on using content in the emails to argue that the regulator has been inconsistent in its application of securities laws to cryptocurrencies. 

The big question now is what does the Grayscale case  mean for investors. Ryan Selkis, the co-founder and CEO of Messari, the data intelligence outfit, said in his latest research, there’s an incentive mismatch between Grayscale and holders of GBTC. 

Grayscale makes about $400M from the management fees it charges its assets under management (AUM), according to Selkis. If, as an ETF, GBTC jumps up 30% up to par with the BTC the security represents, many people will likely take that jump and sell the security. This would leave Grayscale with less AUM. And less fees. 

Discount Rate

Selkis points says in his research that a winning ETF case for Grayscale would cut its revenue by over 50%. 

Specifically and according to Grayscale’s data, one share of GBTC cost $12.06 at market close on June 30 while the fraction of a Bitcoin that share represents was worth $17.41. Depending on who you ask (YCharts shows an all-time low of 34.08% coming on June 17), that’s a record low for the premium-turned-discount rate. 

Whether the discount rate hit a true all-time low may be splitting hairs however — the big picture is that GBTC’s discount rate to the underlying BTC has trended in one direction for the past five years — down. 

GBTC’s discount has been widening in 2022. Source: YCharts

With a legal battle between Grayscale and the SEC underway, it may actually be GBTC holders which continue to suffer the most as the discount continues to deepen. 

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