11 Jul 2023

GBTC discount narrows to May 2022 levels

GBTC's discount has risen to 26.5% following BlackRock's BTC ETF announcement.
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Following the BlackRock ETF filing, Grayscale’s discount to its NAV has narrowed significantly from -44% on June 13 to -26.5% on July 6, pushing GBTC’s YTD returns to 141%. The narrowing discounts stem from increased perceived odds of an ETF approval after BlackRock’s filing, in addition to the market inferring that the filing is partly motivated by BlackRock assessing the Grayscale lawsuit against the SEC to conclude in favorable terms for Grayscale.While the discounts have narrowed substantially lately, we still view Grayscale’s current discount of 26% to its NAV as a promising opportunity. Accounting for annual management fees of 2%, the discounts still imply that Grayscale will remain close-ended until 2036.Overhang related to Grayscale’s parent company DCG still represents a poignant risk factor justifying a certain GBTC rebate. Gemini’s feud with DCG has escalated over the past week. On July 7, Gemini filed a lawsuit against DCG based on a fraudulent representation of a promissory note of $1.1 bn in 2022, after 3AC’s collapse and a failure to honor redemptions since November 2022. The trial will likely be a lengthy process with potential spill-over implications for Grayscale and GBTC.
A dangerous arb?
The current discount represents a $5bn potential arbitrage, as we have mentioned previously, as 160,000 BTC as the value of 160k BTC is not reflected in the share price of GBTC. This could create an arbitrage dynamic in case of an ETF approval where market participants buy GBTC and sell BTC spot to take advantage of the discounts.
However, GBTC currently trades in a relatively illiquid OTC market. It only required a daily average volume of $117m in the week following BlackRock’s filing to push the discounts from -44% to -26%. This illiquidity in GBTC speaks in favor of discounts narrowing rapidly with muted price impact if GBTC succeeds in its ETF endeavors.
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