BlackRock’s ETF deposit could be good for the Grayscale Bitcoin Trust (GBTC)

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After all, there may soon be more investment money in Bitcoin (BTC-USD). Despite the investment fund exit problem that has plagued the entire cryptocurrency landscape recently, BlackRock (BLK) apparently sees an opportunity in the market after dropping a US-listed Bitcoin ETF on June 15. . This is, frankly, an interesting development given the ongoing war between the United States Securities and Exchange Commission and the broader cryptocurrency industry.

According to the application package, BlackRock’s ETF would be called iShares Bitcoin Trust and would use Coinbase (COIN) to hold Bitcoin held for investors. The price reference rate for the underlying assets will come from CF Benchmark, which is a subsidiary of the crypto exchange Kraken. Both Kraken and Coinbase have recently had a run-in with the SEC. Through the Trust, BlackRock would issue 40,000 Baskets of Shares on a rolling basis. Redemption would not be permitted on an individual share basis. However, full baskets of 40,000 shares may be redeemed by authorized participants.

Bitcoin and ETF spot, a turbulent history

The BlackRock app is important because there are currently no spot Bitcoin ETFs in the United States. However, no US-based BTC spot product is due to lack of testing. The SEC has somewhat notoriously denied every Bitcoin spot ETF application to date; of which there have been more than a dozen. Van Eck, WisdomTree, Ark 21Shares, Global X, NYDIG and Grayscale have all been denied one-time requests in recent years. In many cases, these companies have suffered multiple refusals.

The SEC’s negative stance on cash ETFs has generally been attributed to what the agency claims are a lack of investor protection and manipulation issues. Cash ETFs are available elsewhere, however. For example, Canadian investors have the Purpose Bitcoin ETF (BTCC:CA). So far, the SEC has only licensed Bitcoin futures ETFs like the ProShares Bitcoin Strategy ETF (BITO) in the United States. BITO is a fundamentally different product from spot ETFs as it uses short-term contracts for exposure to Bitcoin rather than holding the asset directly.

GBTC shareholders could be the real winners

The largest Bitcoin investment vehicle in the United States by AUM is the Grayscale Bitcoin Trust (GBTC). GBTC was launched in 2013 and traded domestically via OTC markets. This fund currently manages nearly $16 billion in BTC, but the fund’s stock market capitalization is trading at just over $9 billion due to the fund’s painful NAV price trend:

Data by YCharts

After trading for many years at a significant premium to the fund’s net asset value, the shares moved to a discount in 2021 and have fallen dramatically against the underlying asset since then. At one point towards the end of 2022, GBTC shares closed just under 49% off NAV. While the rebate has returned to a less awful 42% at the time of article submission, GBTC shares are still underperforming both BITO futures ETF shares and the underlying asset over the past few months. last 12 months:

Data by YCharts

The company has repeatedly tried to right the ship, including requesting the conversion of shares into ETFs. However, Grayscale’s request to convert the fund was denied by the SEC last year. Following that denial, Grayscale sued the SEC and claimed the agency was “arbitrary, capricious, and discriminatory.” Grayscale further claimed that the SEC used faulty logic for the denial. One of the ongoing speculations in the market has been that GBTC shares would return much closer to net asset value if the fund were allowed to convert to ETFs and offer share buybacks for the underlying asset.

Even with a high minimum repurchase threshold, the ability to redeem GBTC shares for the underlying asset would trigger a dramatic higher revaluation in GBTC, as arbitrageurs buying Bitcoin at a 40% discount via GBTC shares could immediately repurchase the underlying and pocket the difference after delivery. Somewhat corroborating this thesis was the stock price’s response to a panel of judges grilling SEC attorneys at a hearing in March. GBTC shares closed over 14% on a day when BTC was actually down in response to jury questions.

Risks

There is certainly no guarantee that BlackRock’s ETF application will be approved by the SEC. Gary Gensler seems to be on a personal mission to get capital away from traditional investors as much as possible in the crypto industry. It seems unlikely in my view that BlackRock’s application will be approved. However, the mere fact that BlackRock even submitted an application for a spot ETF is very telling. Despite recent exit issues, there is clearly investor interest in Bitcoin exposure, judging by Grayscale’s $16 billion AUM for GBTC.

Summary

In the unlikely event that BlackRock’s request is indeed approved, it could be argued that Grayscale’s conversion request should also be reconsidered and eventually approved. I think even the remote possibility of BlackRock’s application being approved makes GBTC shares a very attractive arbitrage play at current levels. It’s hard for me to understand how the SEC could justify approving BlackRock after denying so many other companies. But it’s also hard for me to understand why BlackRock would try even if the company didn’t believe internally that their bid had a chance.

From where I am, the potential of a BlackRock spot ETF is a positive catalyst for BTC from a price-per-coin perspective. The company has a monstrous $9.1 trillion in assets under management. If even just 0.1% of that wealth ended up in the spot ETF offered by BlackRock without cannibalizing other BTC investment funds, that would be a $9 billion bid on BTC. This offer would theoretically help GBTC stock prices, even if the net asset value discount remains exactly where it is.

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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