US investors have been waiting for Bitcoin exchange-traded fund (ETF) approval since May 2014, when Winklevoss Bitcoin Trust submitted a change request to the US Securities and Exchange Commission (SEC). Over the years, the SEC has rejected every application, and the most recent rejection came after WisdomTree’s spot BTC application on Oct. The offer may result in “fraud and market manipulation,” according to the SEC. In addition, it may result in “violations of exchange rules and applicable securities laws and rules”. Meanwhile, the Grayscale Bitcoin Trust fund is trading at a record discount. Here are the details…
Grayscale Bitcoin fund is on record sale: What’s the reason?
Bitcoin investment trust tools have been around since 2013, but are limited to accredited investors. A spot-based BTC ETF opens the market to individual investors. It also provides the opportunity for a wider range of mutual funds in the industry. Currently, US regulators are reluctant for many to launch an ETF. BTC spot ETFs continue to be rejected. But the same product has long been available for bonds, global currencies, gold, Chinese stocks, real estate, oil and silver.
Grayscale Bitcoin Trust Fund (GBTC), a $12.3 billion investment fund, is currently trading at a record 36.7% discount compared to Bitcoin shares. However, this may not be a purchase type discount. The gap between the spot price and the trust fund began after the Toronto Stock Exchange launched the Purpose Bitcoin ETF in February 2021.
What is an exchange traded fund?
An ETF is a type of trust that holds a variety of underlying investments such as commodities, stocks or bonds. An ETF is similar to a mutual fund in that it is pooled and managed by its issuer. SPY, the ETF that tracks the S&P 500 index, is the most popular example of this. The mutual fund is currently managed by State Street. It carries $328 billion in assets under management. Buying an ETF gives the investor direct ownership of that investment asset. It creates different tax events against futures contracts and leveraged positions.
Trust funds such as GBTC do not offer redemption or conversion rights. Mutual funds are outside the jurisdiction of the SEC and are actually regulated by the US OCC. Grayscale’s GBTC is the absolute leader in the cryptocurrency market despite being a corporate structure. An investment trust is considered a closed-end fund. So the number of shares available is limited. As a result, GBTC shares are not freely created and do not offer a repayment program. This inefficiency creates significant price discrepancies against the underlying Bitcoin assets of the fund. In contrast, an ETF allows the market maker to create and use shares. Thus, it ensures that the premium or discount is minimal most of the time.
For example, the Purpose Bitcoin ETF (BTCC.U) had a net asset value of $3.59 per share on October 13. Shares closed at $3.60 on the Toronto stock exchange. Similarly, the base price of the derivatives-focused ProShares Bitcoin Strategy ETF (BITO) was $11.94 on Oct. 13. Its shares were trading at $11.95.
Grayscale battles the SEC
In June 2022, asset manager Grayscale filed a lawsuit with the SEC regarding converting GBTC into a spot-based Bitcoin ETF. As we reported as Kriptokoin.com, the firm has been waiting for a final decision from the regulator since it submitted its application in October 2021. Grayscale’s senior legal strategist said the SEC rejection was “arbitrary.” As a result, the asset manager filed a legal appeal based on the SEC’s alleged violation of the Administrative Procedure Act and the Securities Act. It should be noted that it has been eight and a half years since the first request for Bitcoin spot ETF registration was submitted.
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