Grayscale 'GBTC Discount' Widens After SEC Bitcoin ETF Rejection

A key crypto market metric known as the "Grayscale discount" is widening after the U.S. Securities and Exchange Commission rejected an application to convert the world's biggest bitcoin fund into an exchange-traded fund (ETF).

The shares of the Grayscale Bitcoin Trust (GBTC) are now trading at a 31% discount to the value of the underlying bitcoin, based on figures posted on the website for Grayscale Investments, the fund's manager. Prior to the SEC's decision, the GBTC discount was 28.4%.

The widening in the discount is seen as a sign of waning optimism for a conversion anytime soon – the opposite of what was happening last week, when some investors were buying GBTC, betting on the fund's chances, said Pablo Jodar, financial products manager at Storm Partners, a tech supplier for the crypto industry in Europe.

“Now, with the news that the SEC is not approving the ETF, it is having the opposite effect,” Jodar said.

The GBTC fund's abysmal performance over the past year relative to bitcoin is at the heart of the recent meltdown of the once-highflying crypto hedge fund Three Arrows Capital and of subsequent losses that have spread to crypto lenders, including Genesis Trading. (Both Grayscale and Genesis are owned by Digital Currency Group, which also owns CoinDesk.)

The Grayscale Bitcoin Trust, which is often referred to by its stock trading symbol GBTC, is a type of investment vehicle that allows U.S. stock investors to gain exposure to price movements of BTC. One drawback of the trust's structure is that it has no clear mechanism for big investors to redeem the shares for the underlying bitcoin; if the vehicle worked like an ETF, the thinking goes, investors would quickly buy up the GBTC shares until they roughly approximated the value of the underlying bitcoin; the discount would evaporate.

Grayscale files suit

Immediately after the SEC rejected Grayscale’s application to convert its trust into an ETF, Grayscale filed a lawsuit against the regulatory agency.

Sean Farrell, head of digital asset strategy at FundStrat, said the SEC's rejection didn't come as a surprise.

“Our base case was an SEC denial, and based on the lack of a reaction in the spot market following the SEC's denial, I think that was the market's base case as well,” Farrell said.

He added that “while we certainly maintain it is appropriate to protect one's downside in the current environment, any incremental selling should not be attributed to the ETF denial specifically.”

He said he's not sure if there’s ample rationale for the discount to compress until the freshly filed litigation moves closer to a resolution – “or until there is regulatory clarity regarding oversight of spot exchanges, which might allow the SEC to change its tune.”

Ryan Selkis, CEO of the analysis firm Messari, said earlier this week that any court decision is probably years away.