The GBTC discount to NAV has dropped below 16% for the first time since December 2021, as the SEC fails to appeal against the recent Grayscale ruling. The court will now likely instruct the SEC to re-evaluate Grayscale’s application to convert its GBTC product to a spot bitcoin ETF.
The Grayscale Bitcoin Trust (GBTC) discount has reached its lowest level in nearly two years as the market anticipates a possible approval of a spot bitcoin ETF by the SEC.
The GBTC discount to NAV — meaning how much lower the market price of each share is than the value of the bitcoin it represents — is trading below 16% for the first time since December 2021, hitting 15.9% by market close on Friday, according to The Block’s data dashboard.
When there is more demand than supply, GBTC shares trade at a premium to NAV, meaning that investors are willing to pay more than the value of the underlying bitcoin.
Conversely, when there is more supply than demand, GBTC shares trade at a discount to NAV, meaning that investors are willing to sell for less than the value of the underlying bitcoin.
GBTC historically traded at a premium until 2021’s crypto credit crunch, when many investors liquidated their positions amid market volatility and regulatory uncertainty. Since then, GBTC has been trading at a persistent discount, which reached a record high of 44% in June 2021.
GBTC Discount Narrows: What Does It Mean for the Market?
The GBTC discount began to narrow when BlackRock and several other financial institutions filed spot bitcoin ETF applications in mid-June, where the discount fell from 44% on June 15 to 26.7% by July 5.
Since then, the figure has continued to decline, as the market expects that a spot bitcoin ETF approval would boost the demand for GBTC shares and allow Grayscale to convert its product into an ETF.
The SEC had until midnight on Friday to appeal the ruling involving Grayscale’s attempt to convert its flagship GBTC fund into a spot bitcoin ETF. An appeal after the market close was unlikely.
Reuters and Bloomberg reported that the SEC would not appeal, and a source also told The Block that the regulator was not planning to, which proved to be the case as the deadline passed.
The court will now likely confirm its instruction that the SEC re-evaluate Grayscale’s application to convert its GBTC product to a spot bitcoin ETF, though the SEC could find other reasons to deny it.
The SEC did not provide a statement, with Chair Gary Gensler declining to comment on the matter when asked at a press conference on Friday.
“The Federal Rules of Appellate Procedure’s 45-day period to seek rehearing has now passed,” a Grayscale spokesperson told Fox Business over the weekend. “The Court will now issue its final mandate within seven calendar days. The Grayscale team remains operationally ready to convert GBTC to an ETF upon the SEC’s approval, and we look forward to sharing more information as soon as practicable.”
Last week, Bloomberg Senior ETF Analyst Eric Balchunas said the SEC is actively working with other issuers on redemption, custody, and legal aspects — in a “break from the typical pattern of delay, delay, radio silence then denial.” He predicts a 75% chance of approval by the end of this year and 90% by March 2024.
While optimism may be increasing, any such approval is not likely to happen quickly, according to Jennifer Schulp, director of financial regulation studies at the libertarian think tank Cato Institute.
“It doesn’t mean that that approval is coming quickly, and it’s still not a certainty given that the SEC could re-review and deny on different grounds and basically start this legal fight all over again”
Schulp said on Friday
A three-judge panel in the U.S. Court of Appeals for the D.C. Circuit ruled in August that the SEC has to re-review Grayscale’s bid for a spot bitcoin ETF after the asset management firm sued the agency last year following its rejection of the plan for the conversion of its flagship GBTC fund.
GBTC vs. Bitcoin Performance
GBTC has outperformed Bitcoin year-to-date, up 146.4% compared to bitcoin’s price gain of 67.6%, according to TradingView.
This is partly due to the fact that GBTC started the year at a premium of 40%, which has since narrowed to a discount of 16%.
However, GBTC still lags behind bitcoin in terms of long-term returns, as GBTC has gained 1,100% in the past five years, while bitcoin has surged 3,300% in the same period.
The narrowing of the GBTC discount to NAV indicates that the market is pricing in a higher probability of a spot bitcoin ETF approval by the SEC, which would be a major milestone for the crypto industry and a catalyst for more institutional adoption.
A spot bitcoin ETF would also benefit GBTC investors, as it would allow them to redeem their shares for bitcoin or sell them at a fair market price.
However, investors should also be aware of the risks and uncertainties involved in investing in GBTC or any crypto-related product. The SEC could still reject Grayscale’s application or delay its decision indefinitely, which could widen the GBTC discount again.
The crypto market is highly volatile and subject to regulatory scrutiny, which could affect the performance and liquidity of GBTC and other crypto products.
Therefore, investors should do their own research and due diligence before investing in GBTC or any crypto product and only invest what they can afford to lose.
Investors should also diversify their portfolios and use proper risk management techniques to protect their capital and profits.
