You Can Buy Bitcoin At A Discount, If You Trust The SEC To Be Rational

00:00 Intro
00:25 What Is Grayscale Bitcoin Trust?
02:04 What Makes This Trust Profitable?
04:11 Why Grayscale Sued The SEC
06:52 Grayscale’s Big Win
09:38 What It Means For Investors
11:35 What Happens Next?

After more than two years of unintentionally offering a way to buy bitcoin for less than its market price (sometimes a lot less), the world’s most popular cryptocurrency investment fund is advancing in an attempt to change its format—thanks to a court victory that could provide an overnight bonanza to investors. Logically, the question should be more when, than if, the $16 billion Grayscale Bitcoin Trust (GBTC ) will transform into an exchange-traded fund from its current restrictive format. But it is not entirely clear that the U.S. Securities and Exchange Commission is ready to abandon a position that stands in the way of that change.

Right now, GBTC units trade at $19.26 but represent a claim on $23.33 worth of bitcoin. The trust, similar to a closed-end mutual fund, can change hands above or below its net-asset value (NAV), allowing investors to place a premium or discount on the value of its holdings. The design allows institutional and wealthy individual investors to buy fund shares at the NAV, and in previous years this provided a perverse incentive for it to trade at a premium that reached as high as 100% and spent most of 2019 to 2021 at about 30%.

After a period of six months, the NAV purchasers could dump the shares on retail investors in over-the-counter trading at massive premiums, reflecting a lack of ways for individuals to invest in bitcoin without exposure to hackers and the complexity of crypto wallets and irreplaceable passwords. Then the sellers used their profits to buy more GBTC at face bitcoin value and do the whole process again. Rinse and repeat. Sophisticated traders could also protect their downside by simultaneously shorting bitcoin in the futures market. Meanwhile, Grayscale collected annual management fees of about 2%.

The premium persisted until February 2021 when it abruptly disappeared after spot bitcoin ETFs appeared in Canada, rapidly reaching a discount of 17% in May, according to Y Charts. That caught the eye of Forbes investing columnist William Baldwin, who suggested in July of that year that investors who thought that Grayscale might decide to seek ETF status for the trust, and that the SEC might be amenable to granting it, should load up on GBTC. At the same time, he wrote, buyers could protect themselves from a bitcoin downdraft by shorting the cryptocurrency in the futures market.

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