The launch of a spot-based bitcoin (BTC) exchange-traded fund (ETF) will make the asset more accessible to individual investors and mutual funds. Also, unlike futures-based Bitcoin ETFs, spot-based ETFs actually involve buying BTC.
So will the approval of the first Bitcoin ETF be a bullish event? unnecessary.
GBTC ‘discount’ remains in double digits
The U.S. Securities and Exchange Commission (SEC) has rejected every Bitcoin ETF applicant over the years, with the latest rejection being issued to VanEck Bitcoin Trust on March 10, 2023.
The SEC concluded that the offer did not “enter into a comprehensive surveillance sharing agreement with the sizable regulated market associated with spot bitcoin.” Regulators have been hesitant to release what many see as a more fair and transparent bitcoin product.
Investors are now questioning whether ARK Investment and BlackRock’s latest bid to launch a spot bitcoin ETF could be a solution for the Grayscale Bitcoin Trust (GBTC), an investment vehicle that trades shares on the stock exchange.
Interestingly, GBTC’s “premium” jumped to its highest level in months after BlackRock announced the ETF filing.
However, while the potential approval of a spot bitcoin ETF may seem bullish at first glance, its impact on BTC prices could be negative, at least in the short-term.
What are ETFs?
First, an ETF is a form of security that holds multiple underlying investments, such as commodities, stocks, and bonds. An ETF may be similar to a mutual fund in that its issuer pools and manages a given asset.
The most famous example of this tool is SPY, the ETF that tracks the S&P 500 Index. State Street manages $436 billion in assets at the mutual fund.
related: Bitcoin ETF race intensifies as ARK Invest adds monitoring protocol to app
Buying an ETF gives investors direct ownership of the fund’s contents, leading to different tax consequences than holding futures contracts or leveraged positions. While bitcoin spot ETFs continue to be rejected, equivalent products have emerged for decades in bonds, global currencies, gold, Chinese stocks, real estate, and oil.
A 30% GBTC discount might be justified
Grayscale Bitcoin Trust (GBTC), an investment fund with $18.4 billion in assets under management, is currently trading at a -30% discount to its Bitcoin holdings. In December 2022, the gap between their 626,778 BTC market capitalization and regular stock exchange-traded GBTC shares was as low as -49%.
Therefore, this discount may be justified because the instrument lacks the tools to allow arbitrage. Grayscale’s GBTC is the undisputed leader in the cryptocurrency market, despite being classified as a closed-end fund, which means the number of available shares is limited.
Shares of GBTC are not freely created and have no redemption plan. Because of this inefficiency, there is a large price discrepancy compared to what the fund actually holds in bitcoin. In contrast, ETFs enable market makers to issue and redeem shares, ensuring that premiums or discounts are usually small.
GBTC charges a fixed annual management fee of 2%; therefore, the discount may be acceptable given the SEC’s continued rejection of all fund manager appeals and requests.
ETFs, on the other hand, typically trade at par with net assets, not GBTC. For example, the Purpose Bitcoin ETF (BTCC.U) had an NAV per share of $5.63 on June 27, and the share price closed at $5.65 on the Toronto Stock Exchange.
Likewise, the US derivatives ProShares Bitcoin Strategy ETF (BITO) had an underlying price of $16.89 on June 28, while its shares were trading at $16.89.
Spot Bitcoin ETF Approval May Initially Pressure BTC
In essence, investment trust products are far less popular than ETFs, and so far, Grayscale has done little to mitigate the impact on GBTC investors. Sentiment improved slightly, however, after BlackRock, the world’s largest asset manager, filed to launch a bitcoin spot price ETF.
If the SEC allows asset manager Grayscale to convert its GBTC Trust into a true Bitcoin ETF, the discount to its content will eventually approach zero as redemption and arbitrage opportunities arise.
In this case, a large amount of Bitcoin could enter the market as investors are finally able to liquidate their positions at face value.
The only question is: how much of that $18 billion will flow into other bitcoin-related instruments or be sold on exchanges?
In any case, with BTC locked for 3-8 years re-entering the market, there is a good chance that the spot Bitcoin ETF approval will generate significant selling pressure from Grayscale’s GBTC conversion.
This article is for general informational purposes only and is not intended and should not be construed as legal or investment advice. The views, ideas and opinions expressed here are solely those of the authors and do not necessarily reflect or represent the views and opinions of Cointelegraph.
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