Things to Consider Before Entering the Bull Cycle — Part 1: GBTC
Hey folks, seeing as we’ve nearly been in this bear market for a full two years now, we should have had ample time to position ourselves adequately for the next inevitable bull-run up. In a series of articles, (I’m not quite sure exactly how many yet) my goal is to do a deep dive into some different ideas that will hopefully lay the foundations of some potentially lucrative plays out there (and on the other hand, things that might be worth avoiding) before the next bull cycle really goes into full swing.
In this article, we’re going to be talking about the Grayscale Bitcoin Trust (GBTC), and why I think it will be extremely interesting to watch over the next coming months as it most likely will get approval (hopefully in the near future) as one of the first spot bitcoin ETFs.
First let’s go into a little background…
What is GBTC, and why is it a big deal that it becomes an ETF?
If you’re new to the crypto space, GBTC or otherwise known as the Grayscale Bitcoin Trust, became publicly available in early 2020 and in its current form, allows people to be able to have exposure to $BTC through a CEF (close-ended fund) through issued shares. Compared to ETFs there are several factors that can hamstring trusts like GBTC, the most significant including:
Fixed Shares — closed-ended funds (CEFs) like GBTC have a fixed number of shares. ETFs on the other hand are able to issue new or redeem existing shares, depending on whether or not the ETF’s market cap is above/below its underlying asset price
Fixed Liquidity — GBTC also has fixed liquidity, meaning that no underlying assets (in this case $BTC) can be added or subtracted from their total liquidity. ETFs on the other hand generally have much higher and assets can be redeemed and/or rebalanced relatively easily.
Limited Accessibility /Regulation— As it is not an SEC-approved ETF, GBTC is only available to be traded on Over-the-Counter markets. Institutions can technically still access GBTC, but it’s generally considered a lot riskier to do so as they don’t have the same transparency requirements and protections given by the SEC.
The Discount
The biggest reason why myself and many others have been paying close attention to GBTC is because of its NAV (Net Asset Value) discount — a discount which is currently sitting at -17.13%:
The NAV discount symbolizes that the price per share of GBTC is essentially off its peg with the underlying $BTC that it’s supposed to represent. For crypto degens this discount may seem rather significant, but as you can see from the chart above, this discount nearly a year ago hit as low as -48.89%. As I mentioned before, because GBTC has a fixed amount of liquidity with a fixed number of assets, that means since inception it has had the same amount of $BTC, which is precisely 643,572 $BTC:
Due to normal buy/sell market pressures as more people are willing to sell their GBTC shares at a lower price, the NAV discount increases, and vice versa when more people are willing to buy GBTC at a high price, the NAV discount decreases.
It should also be noted that because when you buy/sell shares of GBTC you aren’t actually buying or selling any new $BTC, the buy/sell pressure of GBTC technically should only effect GBTC’s NAV discount, NOT the actual price of $BTC. For this reason when people like Cathie Wood of ARK (the largest holder of GBTC) sold millions of dollars worth of GBTC last week, $BTC wasn’t phased and its price continued to rise. Conversely with an ETF, because new shares can be issued/redeemed in direct accordance with buy and sell pressures of $BTC, the prices are more two of the same.
Grayscale and the SEC
There’s quite a bit of bullish news as of late for Grayscale’s odds of getting GBTC converted to a spot ETF approved very soon. Here’s a quick timeline:
October 2021: Grayscales files to convert GBTC into a proper $BTC ETF
June 2022: the SEC formally denies Grayscale’s proposal on grounds that it didn’t meet the SEC’s standards to “prevent fraudulent and manipulative acts and practices.” Grayscale immediately sues the SEC.
August 2023: Courts rule in favor of Grayscale, and orders the SEC to re-review Grayscale’s application, giving the SEC also a 45-day window to be able to appeal the court’s decision.
October 2023: SEC chooses not to appeal the court’s decision
Although this is certainly not a guarantee that Grayscale’s GBTC is going to get approved to become an ETF, it certainly is a good sign that not only did the SEC not appeal, but because there’s a significant amount of pressure from other players who have also applied for ETFs with their own reviews coming up soon. This leads me to my next session…
All the King’s horses and all the ETF’s men
Grayscale is currently only one of several different companies that are currently knocking on the door of the SEC trying to get a $BTC ETF. To date, these include:
As you can see from the dates in red, including Grayscale’s rejection last year, the SEC has to-date been passing off deadlines for every application, with the next set of deadlines including Hashdex and Franklin’s 2nd deadlines on January 1st, 3rd deadlines for Blackrock, Bitwise, VanEck, Wisdomtree, Invesco & Galaxy, Fidelity, and Valkyrie, and most notably ARK’s final deadline on January 10th.
Due to it being ARK’s final deadline, many are suspecting that not only will ARK get an approved $BTC ETF, but taken from an interview SEC chair Gary Gensler himself, it remains pretty clear if approved that not only one, but many companies will be approved for an ETF at the same time. You can watch the full interview here:
Grayscale and DCG
Apart from the likelihood of an ETF approval, the biggest cloud overhanging Grayscale is it’s affiliation with DCG. DCG (Digital Currency Group) is the parent company of a host of different companies, including GTBC and unfortunately its more notorious brother, Genesis.
As recent as two weeks ago, both Genesis and DCG were sued by the New York Attorney General’s office for its involvement of allegedly defrauding customers through financial reporting. As one of the many companies that experienced contagion fallout from the downfall of Terra and 3 Arrows Capital, DCG was most infamous for being the last contagion-domino to fall, as well being part of several twitter-fed vitriolic exchanges with the Gemini exchange (which is also named in the suit).
Genesis filed for Chapter 11 bankruptcy in early 2023, and given the uncertainty for what the future holds for this pending lawsuit, it remains to be seen how DCG might be affected as well and if so, what future implications that may have on GBTC.
Is GBTC a lucrative play?
With the current discount of GBTC being -17.13%, this means technically that if converted successfully into an ETF, the NAV discount should close completely and the GBTC (now ETF) shares should accurately reflect its underlying assets. In other words, GBTC should no longer be trading at a discount (or premium).
Should I ape in now to make an immediate 17.13%? Hold on. There are a few things that I think are worth considering…
The SEC still may not approve GBTC on January 10th — Personally, I think it’s very likely that the SEC will one day approve the conversion of GBTC into an ETF, but I’m not wiling to “bet the farm,” that it’s going to happen by January 10th. In fact, given the amount of artificially-generated price action that was generated from Cointelegraph’s recent fake news incident, although that sentiment might be changing, it seems that the market may have thought that as well too.
Cointelegraph might have screwed us — Speaking of the fake news incident, the significant price moves we saw with Cointelegraph’s mistake is exactly one of the reasons for why the SEC has denied ETF applications in the first place. Take into account a tweet that I highlighted in a previous article:
Looking at item number ‘5’, the run up on $BTC after Cointelegraph falsely reported an approval of an ETF is a perfect example of “trading based on…false and misleading information…”
DCG in trouble —Although there is some uncertainty about what legal difficulties DCG might face in the future, I still have yet to hear anything concrete about whether or not it would impact GBTC’s ability to become an ETF, and even if it did, it most likely won’t be anything immediate. Taking the last NYAG’s lawsuit against Tether into account, their legal battle started in April 2019 and didn’t conclude until nearly 2 years later. Likewise, I would imagine that this suit may last just as long (if not longer) and I would be surprised if there’s anything significant news that would deter SEC approvals anytime soon.
Will History Repeat Itself? — There’s a great deal of speculation that $BTC will do the same thing as gold when it had it’s introduction with ETFs:
Just from a market-to-market comparison of what inflows did for gold, many are speculating that we may see a similar price impact for $BTC:
I honestly have no clue exactly how much $BTC will be worth next year, but what I will say is that the narrative for $BTC to go up by the end of 2024 is a hell of a lot stronger than any narrative I heard for why it might go down.
Conclusion
Does the market already have the ETF priced in? How high will $BTC in the next few months? Is GBTC going to go under with DCG?
I have no freaking clue to any of these questions, so please don’t take it like I do. What I do hope however is that this article gives you some things to chew on as we’re getting ready for the next inevitable bull cycle.
Are there any significant considerations that you think I missed? Feel free to share them in the comments below. And as always, thanks for taking the time to read this and be sure to follow me on twitter (https://twitter.com/CryptosWith) to get all my latest updates. If you want to get access to all my draft links or get an idea about what’s next on my docket before I publish, find me on Friend.tech (and now New Bitcoin City), where if you’re a keyholder, I share all that information in my chatroom. Also, looking for a gift for your Crypto-loving/hating friend? Give them a REKT journal to cheer them up!
Disclaimer: And as a final reminder, this is not financial advice and this is for educational and entertainment purposes only. Please as always, do your own research and find what investments are best for you. Cheers everyone!
