GBTC: Underappreciated Opportunity Amid SEC Battle and Upcoming Bitcoin Halving

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Kanawat TH

Since October 2022, I have been strategically accumulating Bitcoin (BTC-USD) with a particular interest in Grayscale crypto funds, such as the Grayscale Bitcoin Trust (OTC:GBTC). I plan to hold this investment until Grayscale turns it into an ETF, eliminating the net asset value discount present in this closed-end fund. Currently, GBTC is trading at a substantial discount of 40.4%, a notable spread rarely seen in closed-end funds traded in the United States. This steep discount seems unjustifiable, especially in light of Grayscale’s lawsuit against the SEC (I’ve discussed that case in more depth here) for blocking GBTC’s conversion to an ETF. The discount is wider than in my last article.

Data by YCharts

The litigation initiated by Grayscale indicates the company’s intention to turn the closed-end fund into an ETF/ETN, likely driven by obvious commercial motives. Converting GBTC to an open-ended product would result in the creation of the largest crypto-based ETF in the world. As a general rule, the largest ETF/ETN within a category generates a large share of investment flows and therefore a very profitable fund to manage.

Note that I am generally bullish on Bitcoin, and have written countless articles on Bitcoin for Seeking Alpha (back when it was trading below $1000, and there was still some debate as to whether it was to be discussed as an investment). If you don’t like bitcoin you can still like a GBTC position but paired with a short bitcoin position via futures or a close proxy like MSTR, but these are advanced tactics, and if you’re not a experienced trader, it’s probably best to move on to another idea.

There are 5 key factors why I love a GBTC position.

1) Grayscale’s oral arguments in the Grayscale vs. SEC case went very well. Court decision may arrive by the end of the year (see timeline here)

2) Tensions around the financial system are resurfacing, driven by the flow of news around the First Republic (FRC). The latest banking crisis was clearly a catalyst for crypto. I don’t think it’s a sustainable driver or it has to be a driver, but the market does what it does without my blessing. Bitcoin’s popularity is partly the result of the GFR and the resulting widespread dissatisfaction with the financial industry. This feeling is again salient.

3) Rep. French Hill (of the Digital Assets Committee) and Majority Whip Tom Emmer sent a letter (read full text here) to SEC Chairman Gary Gensler expressing concerns about regulatory inconsistency in dealing with spot bitcoin exchange-traded product applications. They argue that the SEC’s refusal to approve spot Bitcoin ETPs is inconsistent and disregards other jurisdictions where similar products have been approved. They also criticize Gensler’s differential treatment of bitcoin futures ETPs, which are allowed to trade in the United States, and bitcoin spot ETPs, which are continually denied.

Basically, this letter echoes Grayscale’s argument in Grayscale vs. SEC. However, I think it is important that there is additional pressure on the SEC to mend its ways. I happen to believe in the long-term viability of Bitcoin. However, I have tons of other investments, and I won’t lose much sleep if he leaves. So, I’m biased but I don’t think I’m emotionally overinvested in this asset class. While trying to objectively weigh the merits, I do think the SEC treated Bitcoin a bit unfairly. Grayscale has a good chance of being justified.

4) The next Bitcoin halving is probably less than a year away. Essentially, the Bitcoin halving refers to the process by which the rewards miners receive for verifying and adding new transactions to the blockchain are halved. When Bitcoin was first introduced in 2009, the reward for successfully mining a block was 50 Bitcoins. Since then, halvings have taken place in 2012, 2016, and 2020, reducing the block reward to 25, 12.5, and 6.25 Bitcoins, respectively. The next halving is expected to take place around 2024, further reducing the reward to 3,125 Bitcoins per block. Supply reduction (because the reward decreases but also because older mining equipment suddenly becomes unprofitable) this tends to create an imbalance between supply and demand, which can lead to an increase in value bitcoin. As the number of new Bitcoins entering the market decreases, investors often anticipate a price spike due to scarcity.

I scoured the internet for a chart illustrating the effect of the halving and found this fun chart from Blockchain Center:

Bitcoin Halving Chart (Blockchain Center)

Don’t take the Rainbow Channel too seriously, I suppose, but the chart shows where the halvings occurred and how prices moved after that. You would expect traders to increasingly anticipate this event, and I noticed that the halving was beginning to resume. I believe the chatter will increase as the date gets closer and as Bitcoin’s bullish price action supports this narrative.

5) The fifth reason is, of course, the discount. If Grayscale turns the closed-end fund into an ETF, that’s a 66% increase on its own. This is compounded by Bitcoin price action. Given that I’m bullish on Bitcoin, this is a very attractive proposition. THE

6) The technique generally still looks favorable for GBTC and Bitcoin. The 50-day GBTC MA just crossed the 200-day mark, which is a classic technical signal, but others paint a similar (but not exclusive) picture.

Data by YCharts

In conclusion, despite the setbacks in the crypto world and the ongoing battle between Grayscale and the SEC, there are compelling reasons to maintain a bullish position on a GBTC position. Developments in the Grayscale vs. SEC case, increased pressure on the SEC from lawmakers, anticipation of the upcoming Bitcoin halving, and the substantial discount on GBTC all contribute to an attractive investment opportunity. Additionally, technical indicators usually support both GBTC and Bitcoin, providing additional incentive for investors. While the future remains uncertain, the potential for asymmetric returns (through the compounding effect of bitcoin discount and price) makes GBTC an attractive prospect for those confident in bitcoin’s long-term viability and growth. transformation of the closed market. funds in an ETF.

Editor’s Note: This article discusses one or more securities that do not trade on a major US exchange. Please be aware of the risks associated with these actions.

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