(Bloomberg) — The Grayscale Bitcoin Trust’s long-awaited conversion into an exchange-traded fund has eliminated the fund’s discount, turning the page on an arbitrage trade that over the years has been both a slam-dunk and a heartbreaker.
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The roughly $21 billion fund, known as GBTC, saw its price close at a 0.02% premium to its net asset value as of Thursday, data compiled by Bloomberg show. Before its conversion to an ETF last month, GBTC’s structure left it vulnerable to eye-popping premiums to its underlying holdings which then flipped to double-digit discounts.
GBTC’s once-hefty premium created one of the most popular arbitrage strategies in crypto — hedge funds would borrow in Bitcoin, exchange the coins with GBTC for shares, then offload those shares in the secondary market after a lock-up period. That trade soured after physically-backed Bitcoin ETFs launched in Canada in early 2021, dragging GBTC’s price well below the value of its underlying coins. That contributed to a wave of distress that saw the likes of Three Arrows Capital go belly up in 2022.
“It represents the closing of an unfortunate chapter in crypto’s history,” said Noelle Acheson, a long-time trader who writes the “Crypto is Macro Now” newsletter. “GBTC’s premium was an uncomfortable example of traders using leverage to take an advantage of an inefficient market, and its discount became a stark reminder of the power of markets to ‘fix’ themselves.”
Without a redemption mechanism, GBTC had effectively operated as a closed-end fund. Now, as an ETF, specialized traders known as authorized participants work with the sponsor to create and redeem shares, keeping GBTC’s price in line with its net-asset value.
“As the world’s largest Bitcoin product with the highest average daily volume, tightest quoted spread, and longest track record, GBTC is undeniably the backbone of the spot Bitcoin ETF market, and will continue to provide ETF users – a broad range of investors and capital markets participants alike – with confident, credible, regulated exposure to Bitcoin,” a Grayscale spokeswoman said in an emailed statement.
Grayscale retains the adoration of a considerable population of the Bitcoin faithful, who view its triumph over the Securities and Exchange Commission as a potentially precedent-setting blow in crypto’s path to acceptance. A judge’s ruling in August that the agency acted “capriciously” in barring Grayscale’s conversion showed that efforts to seal off the financial system from online currencies were not the fait accompli many on Wall Street had assumed them to be.
Grayscale’s victory fueled speculation that the SEC would finally approve the products, giving way to yet another arbitrage trade that seized upon GBTC’s discount. Even before the court decision, traders had begun snapping up shares of the trust in anticipation of ETF approval, handing tidy profits to the likes of Ark Investment Management and Saba Capital Management.
“The closing of the discount also ends the long term arb trades that a few funds began when the discount was in the 40%’s, and we’re now seeing the effects of that in the pronounced selling,” said Nic Carter, founding partner of Castle Island Ventures.
GBTC has shed more than $5.8 billion since it began trading as an ETF, while its newly launched peers have all posted inflows. The price of Bitcoin has fluctuated wildly amid the rollout — the cryptocurrency punched above $49,000 on launch day only to break below $39,000 less than two weeks later. Currently, Bitcoin is trading near $43,000.
In addition to exiting arbitrage players, GBTC’s relatively high fees are likely also fueling the outflows, according to Carter. GBTC charges 1.5% — while that’s below the 2% fee it carried in its previous form, it’s magnitudes above its closest competitors. Fidelity and BlackRock’s ETFs will eventually charge 0.25% after a waiver period. Franklin Templeton’s fund has a post-waiver 0.19% expense ratio — the lowest among spot-Bitcoin ETFs.
While outflows have slowed in recent days, high costs will likely continue the withdrawals, according to FRNT Financial’s Stephane Ouellette.
“The selling is likely to continue over-time, maybe at a more gradual rate, if fees aren’t brought down,” said Ouellette, the firm’s co-founder and chief executive.
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