Grayscale bitcoin discount narrows with conversion to ETF seen as ‘inevitable’

The prospect of Grayscale converting its bitcoin trust into an ETF is seen as more likely after the SEC declined to appeal a court ruling in Grayscale's favor.

The world’s largest bitcoin fund is surging faster than the cryptocurrency itself as investors anticipate that an exchange-traded fund centered on the token could soon launch.

The Grayscale Bitcoin Trust (GBTC) is trading about 14% below the value of its underlying holdings intraday, the narrowest such reading going back to 2021, according to data compiled by Bloomberg Intelligence. The discount stood near 50% earlier this year.

The shares of the trust have rallied much more than the digital asset itself this year, with GBTC gaining 164% and bitcoin adding about 71%. On Friday, the Securities and Exchange Commission declined to appeal an earlier positive court ruling for Grayscale.

The discount has narrowed significantly in recent weeks, as many analysts who closely follow the going-ons of the trust are anticipating that it will soon convert into an exchange-traded fund, something Grayscale has been saying for years it would like to accomplish. The odds of that happening moved in Grayscale’s favor after the crypto asset manager in August scored a legal victory in federal court in its conversion bid.

“Approval of a spot bitcoin ETF looks inevitable at this point, given the court’s Aug. 29 ruling, the number of recent spot bitcoin ETF applications and the SEC’s engagement with them,” Bloomberg Intelligence analysts Elliott Stein and James Seyffart wrote in a note. “Billions in unlocked value” are at stake, they added.

Excitement around potential ETF approval was evident Monday when a rumor sparked a roughly 10% rally for bitcoin after unverified sources said BlackRock had received the green-light from the SEC. Bitcoin reversed most of those gains after BlackRock debunked the speculation. However, the episode served as a reminder of the enthusiasm among crypto investors for such a product.

Stein and Seyffart argue that chances of Grayscale achieving the conversion heightened after the SEC opted against appealing the August ruling. The regulator could still appeal to the Supreme Court, though most see that as unlikely to happen.

The crypto industry has remained decimated since the downfall of the FTX exchange and a number of other companies last year, all of which has kept token prices depressed. Bitcoin, trading at around $28,000 Monday, is down from a record high of near $69,000 in late 2021. Bitcoin was up about 3.6% as of 10:42 a.m. in New York, while GBTC shares rose 7.9%.

The battle for a bitcoin ETF has been one bright spot for the industry, with many analysts forecasting that one could soon start trading in the U.S. after a decade-long battle by issuers to get one launched.

Issuers have for years tried their hand at getting a spot bitcoin ETF off the ground in the U.S.. Officials have in the past cited market manipulation and other factors as reasons to not green-light applications, though they allowed ETFs based on bitcoin futures to start trading in 2021. But there are currently more than 10 filings for spot bitcoin ETFs, with industry heavyweights like BlackRock and Invesco among those in the race.

“The increasing likelihood that the market will get its first U.S.-listed spot BTC ETF within the next few months” is one factor currently supporting bitcoin, said Noelle Acheson, author of the “Crypto Is Macro Now” newsletter.

The next steps in Grayscale’s fight for its GBTC-to-ETF conversion could involve an opening up of dialog between the crypto firm and the SEC, according to Bloomberg Intelligence. Any clarity on this front is being seen as a positive as the process has remained opaque in terms of how many issuers might get approval — and under what circumstances — and whether multiple ETFs would be allowed to trade all at once, or if any one company might get a head start over its competitors.

Though GBTC’s discount to its holdings has narrowed significantly, it likely wouldn’t go all the way to zero until the actual ETF conversion happens or is announced, according to BI. Still, any positive developments could help send the reading closer to zero, Seyffart said.

“The news in the U.S. over Grayscale’s ETF application has potentially very significant ramifications for the bitcoin market. The story of spot-price ETF approval has been a dominant narrative in the bitcoin market for several months now,” said Simon Peters, market analyst at eToro. “As the barriers to approval fall, hopes among investors continue to rise that we could see these products in the market sooner rather than later.”