Grayscale Bitcoin Trust: Bitcoin At A 16% Discount

Summary Grayscale Investments wins court ruling against SEC, clearing the way for approval of spot Bitcoin ETFs within a year. The ruling could lead to a flurry of ETF approvals and potentially a de-approval of futures ETFs. GBTC currently trades at a 16% discount, but the discount is expected to narrow to around 5-10% as the conversion to an ETF becomes more certain. Grayscale Investments won a court ruling ( see here ) saying the SEC must vacate its rejection of Grayscale's attempt to convert Grayscale Bitcoin Trust (GBTC) into an ETF or exchange-traded fund. I've been anticipating this would ultimately happen since the end of 22'. I've written a short commentary for subscribers when the suit was just won: This doesn't leave the SEC any basis to continue to reject spot Bitcoin ETF's. Because many have been filed in the past few years, the most likely path forward will be a flurry of approvals. There is also a possibility (although I'm not sure how likely) that the SEC will attempt to de-approve the futures ETF's. This seems a risky path (it could easily spark more litigation) and it makes the agency look awful, and it will make very few people happy. I'm guessing there is a 90%+ probability we'll see spot Bitcoin ETF's within one year and possibly quite soon. As I finish this article up GBTC trades at $20.37. My rough estimate is the fund owns $24.6 in Bitcoin per unit. That's a discount of around 16%. Not as much as when I first started writing about this event, but with this court ruling out, it is much derisked. Grayscale wants to convert this fund into an ETF ASAP (see its letter to the SEC dated September 5). When it does convert, the discount should disappear. resulting in roughly ~19% upside. This assumes Bitcoin doesn't move. However, Bitcoin did move when the lawsuit result was announced (around 5%). It could be considered a strong positive for the broader crypto market to see a spot ETF being introduced. The 16% discount is not terribly attractive for a closed-end fund with a volatile asset like Bitcoin subject to steep fees. It is not uncommon for closed-end funds to trade at a 16% discount. Outside the U.S., it is even more common. However, Grayscale intends to convert the fund to an ETF, which changes things. In addition, the assets within the fund can easily be hedged. Data by YCharts Given 1) the assets in the fund can be hedged and 2) the upcoming catalyst, a 17% discount is still a steal. A position like this doesn't have the volatility associated with Bitcoin, but it has 19% upside. Upside, I expect to arrive within a year and possibly even before the end of the year. I believe the discount should have narrowed to 5-10% already. As the timeline to conversion becomes less uncertain, the discount could quickly narrow to 5% and less. I've not hedged out the underlying Bitcoin risk because I think this is a favorable position. The next Bitcoin halving will likely take place within the next six months. The Bitcoin halving is a pre-programmed event that reduces the amount of Bitcoin rewarded to miners for validating transactions. Approximately every four years, the rewards that miners receive are cut in half. Miners tend to sell all their rewards or at least a portion of their rewards. If these rewards are decreased, it limits supply coming into the market. Historically, this supply decrease correlated with periods of exceptional strength in the Bitcoin price. Here's a chart from an article explaining the halving in more depth that illustrates this dynamic: bitcoin halving chart (Cointelegraph.com) The halving isn't guaranteed to drive up prices. Other forces (like higher interest rates for example) could be strong enough to offset its pressure. I also think there has historically been a feedback loop going on. Prices edge up as the halving nears, and this is increasingly confidently explained (on blogs and financial media) as being caused by the halving. It's a story that makes a lot of sense and historically worked, which means people believe it and buy Bitcoin reinforcing the story further. I can't say for sure whether it will happen again, but IF it happens again, the story will only be stronger as the historical pattern proves to hold again. Data by YCharts It is worth mentioning that both GBTC and Bitcoin are trading above their 200-day moving averages which is a bit more relevant to stuff that can't be priced off a future cash flow stream. These technicals tend to influence CTA's and quant funds to buy. Conclusion To summarize my arguments, this ruling is bullish for Grayscale but the broader cryptocurrency sector as well. It should pave the way for approval of spot Bitcoin ETFs within a year but potentially before year-end. GBTC currently trades at a roughly 16% discount per unit which translates into ~19% upside on conversion to an ETF. That's if Bitcoin itself is stable. The upcoming Bitcoin halving event, historically correlating with robust performance in Bitcoin price due to the decreased supply from miner rewards, is rapidly approaching. GBTC and Bitcoin are trading above 200-day moving averages which is a positive for investors driven by price history. This leads me to the conclusion GBTC is still an attractive position on timeframes from short term to long term.