Grayscale Bitcoin Trust’s Discount Is Tempting. Why It’s Not a Slam Dunk.

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There is a way to buy Bitcoin for nearly a third less than the market price, but investors do so at their peril.

That is the broad lesson to draw from the works of the Grayscale Bitcoin Trust (ticker: GBTC), a closed-end trust exclusively focused on holding the digital token. Its the largest such fund in the world, with assets under management of about $12 billion.

To an investor, the fund has long been looked at as an attractive way to get exposure to crypto, despite its 2% annual management fee.

That is in part because it is easy to hold in a brokerage account along with other stocks and exchange-traded funds, unlike direct ownership of Bitcoin, which often must happen through a crypto trading platform such as Coinbase .

Lately, the fund has also been tempting because it trades at an extreme 31% discount to its underlying holdings. So for every $12.06 investors spend on a share of GBTC, in theory theyre getting ownership of $17.41 worth of Bitcoin.

The problem? The erasure of that discount is looking further and further away.

The latest blow came this week, when the Securities and Exchange Commission denied Grayscales bid to convert the trust into an ETF.

Grayscale and its investors have clamored for the conversion, because it would allow institutions to arbitrate away the discount through the usual process of redeeming the funds shares, resulting in a near-automatic profit to those investors who have held on.

Though the SEC last year approved an ETF that holds Bitcoin futures, it has resisted such a decision for a spot ETF, citing potential manipulation on crypto exchanges among other issues.

On Thursday, the trusts price fell nearly 9.5%, even as its holdings fell 6.5%, perhaps reflecting investors disappointment.

Grayscale immediately sued the SEC after the rejection, calling the decision arbitrary and capricious.

We, of course, vehemently disagree with the decision that they made, said Grayscale Investments CEO Michael Sonnenshein in an interview, noting that the funds discount is representative of what is now billions of dollars of unrealized shareholder value.

Sonnenshein said his firm, in addition to the lawsuit, is talking to regulators and to staff for lawmakers on the Senate Banking and House Financial Services committees who might have influence.

An SEC spokeswoman declined to comment.

For GBTC investors, however, it is difficult to envision a positive outcome, at least in the near term.

First, there is the court case. In anticipation of the rejection, Grayscale beefed up its legal team, hiring former solicitor general Donald B. Verrilli Jr., considered an expert on the kind of legal claim Grayscale is making to reverse the decision. Sonnenshein said the case could unfold in less than a year.

However, longtime watchers of such cases are less sanguine.

This litigation will likely take longer than Bidens first term as President, wrote Cowen analyst Jaret Seiberg in a research note, calling it a high hurdle for a court to overturn the decision.

It is also unclear how much pressure lawmakers can realistically put on the SEC to change course.

On Friday, Senate Banking Committee ranking member Pat Toomey(R., Pa.) on Twitter excoriated the SEC for rejecting Bitcoin ETFs, saying that SEC Chair Gary Gensler had imposed enormous costs on investors with no legitimate rationale.

However, lawmakers might be shy to go beyond tough talk on the decision.

It is hard to see any lawmaker making a stand with Bitcoin prices having dropped so much and other tokens having difficulties. It is why there may be rhetoric, but not action, Seiberg wrote.

For his part, Grayscales Sonnenshein says his trusts investors are willing to wait it out and are well aware of the ups and downs of both Bitcoin and the ETF-conversion fight.

These folks tend to have a longer term time horizon for their crypto investment, he said. They can stomach volatility and know the arguments weve been floating in front of regulators for years.

There are other ways for investors to get access to Bitcoin, such as directly through crypto platforms such as Coinbase and FTX or through a Bitcoin futures ETF such as ProShares Bitcoin Strategy (BITO).

Those kinds of vehicles dont give investors any sort of discount on buying crypto.

But, at least for now, Grayscales discount doesnt so much represent a bargain as it does a bet on litigation and policy-making. Investors might win, eventually, but it is no slam dunk.

Write to Joe Light at [email protected]

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