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Grayscale ETF Announcement May Shore Up GBTC Discount, Analysts Say

With redemptions in sight, GBTC shareholders now know they won’t be paying a 2% annual fee forever.

Apr 5, 2021 at 8:19 p.m. UTC
Updated Sep 14, 2021 at 12:36 p.m. UTC

Grayscale Bitcoin Trust shareholders now know they’re not going to be left behind in the bitcoin exchange-traded fund (ETF) race, and that may help alleviate the discount at which GBTC has been trading for over a month, some analysts say. 

On Monday, Grayscale, which is owned by CoinDesk parent company Digital Currency Group, announced it would convert GBTC into an exchange-traded fund when the U.S. regulatory environment warms to bitcoin ETFs.

The conversion would mean GBTC shareholders would no longer have to put up with a six-month lockup or 2% annual management fee. The news could bring GBTC more in line with the net asset value (NAV) of bitcoin, or at the very least put a limit on how steep the discount might go, said James Seyffart, ETF research analyst at Bloomberg Intelligence. (Currently, GBTC is trading at -5.64% to NAV, according to data from CoinDesk subsidiary TradeBlock.)

Some analysts suspect that announcing the ETF conversion is a way to keep the fund, with $38.8 billion assets under management (AUM), liquid by making shareholders happy, especially investors who are coming to the end of their lockup period. 

“Once you go into, like, 14%, 15% discount, [there are] going to be people out there that are willing to buy the GBTC and hold it until it turns into an ETF,” Seyffart said. “At this point it’s not going to go to a 30%, 40% discount, like some people are talking about in hyperbole online.”

GBTC’s premium flipped to a discount around the end of February when Canadian bitcoin ETFs began to be approved by the Ontario Securities Commission (OSC), said Fundstrat lead digital asset strategist David Grider. 

“You compare [GBTC’s 2% annual fee] to the 44 basis points [0.44%] or whatever you’d get on an ETF and there should be a discount,” Grider said. “That’s the time value of the fee. ... That’s also the market signaling it’s worried about the liquidity of GBTC, which doesn’t allow for redemptions.” 

The top two verticals on which ETFs will compete in the future are fees and liquidity, Seyffart added. Grayscale CEO Michael Sonnenshein said he wouldn’t make a prediction about GBTC’s liquidity at the time of conversion, but noted that it would be one of the most liquid commodity ETFs if it converted today. 

“If it were an ETF today, when compared to commodity-based ETFs, GBTC would be the largest in terms of assets under management, behind the SPDR Gold Trust,” Sonnenshein said. “It would be the third-largest in terms of notional trading volume with approximately $2.6 billion per week.” 

Grayscale plans to eventually convert all of its products to ETFs, Sonnenshein said. It’s unlikely the U.S. Securities and Exchange Commission will consider ETFs of other cryptocurrencies before 2022, Seyffart said. 

Currently, GBTC “trades on par with the top decile of ETFs,” Seyffart said, and Grayscale’s ETF success will also hinge on whether the SEC approves one bitcoin ETF at a time or a wave of ETFs at once. 

In addition to competing on fees and liquidity, ETFs will also compete on security, depending on how the bitcoin is stored and insurance policies for that bitcoin. Some ETF issuers may lend out the underlying bitcoin to create higher yields or they could do active trading with options or futures, Seyffart said.

DISCLOSURE

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