14 Mar 2023

Grayscale versus SEC

The market reacted positively to Grayscale’s oral hearing versus the SEC last Tuesday, as GBTC’s discounts narrowed. What's next?
GBTC Discount Mar 14
Source: Ycharts
The narrowing discounts are driven by growing optimism related to the Court of Appeals to vacate the SEC’s order and direct the SEC to reconsider the filing. This piece is a part of our weekly market report, Ahead of the Curve. Read the full 14-page report by clicking here.Anyhow, approval is far from a given outcome. The final verdict is expected by the fall, and Grayscale will have to prove that it’s no harder to manipulate the spot market than the regulated futures market and, in extension, prove that the SEC has no reasonable basis for its arguments. The court questioned SEC on whether they would de-list futures-based ETFs if the court rules against them. Emily Parise representing the SEC, could not add context to the SEC’s course of actions should the ruling be against them but added that an unfavorable ruling would lead the Commission to think anew. Futures-based ETFs currently hold an exposure equivalent to 40,000 BTC in futures.

Potential arbitrage in case of approval

At its current 35% discount, 1/3 of Grayscale’s BTC, 220k BTC, is currently not priced in the market – representing a sizeable arbitrage opportunity in case of conversion down the line. From a pure price perspective, GBTC’s discount prices in that GBTC will remain close-ended until 2044, given GBTC’s annual management fee of 2%. We view it as far more likely that GBTC will get converted to an ETF before 2030 than GBTC remaining close-ended in eternity. This could potentially create a dicey environment in BTC, with traders aiming to utilize the arb by purchasing GBTC and selling/shorting BTC as massive amounts of supply reach the market. Such an event may be hedged by a BTC holder by diversifying parts of the BTC exposure into GBTC. However, any trader considering this trade should be aware of costs affiliated with the trade related to both fees and potentially differing taxation in GBTC vs. BTC. It’s important to note that it only took $100m of volume to narrow GBTC’s discounts from 46% to 35%. More GBTC optimism could reduce the discounts further, and the 220k BTC arb sketched out above may have a less pronounced impact on markets than presented above.
GBTC fee impact svg
Source: K33 Research
This piece is a part of our weekly market report, Ahead of the Curve. Read the full 14-page report by clicking here.
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