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Who wouldn’t want to buy a dollar for 60 cents? The same answer would hold if the currency in question were euros, yen or even bitcoin. But, in the case of one of the largest holders of the cryptocurrency, there is a catch.

Grayscale Bitcoin Trust, under the ticker GBTC, is a publicly traded entity with nearly $11 billion in assets under management, all in bitcoin. It is a way for anyone with a brokerage account to get exposure to the cryptocurrency without the complexity of direct ownership. GBTC held about 635,000 bitcoin as of the end of September, according to regulatory filings, or more than 3% of the circulating supply, according to CoinMarketCap figures.

In contrast to today’s 40%-plus share price discount to the dollar price of the trust’s bitcoin per share, it long fetched a premium, due in part to its simplicity for individual investors. Sophisticated traders loved it too, buying newly created shares and then later selling them at a premium—a kind of arbitrage. That helped the fund grow so large, but the shares slipped to a discount in early 2021. Unfortunately for current owners, the process doesn’t currently work in reverse.

GBTC’s sponsor is Grayscale Investments LLC, which is owned by Digital Currency Group. DCG has previously been authorized to buy shares of GBTC, which is one way to help narrow the discount. As of the end of September, DCG and its companies owned close to 10% of GBTC shares, according to filings. Under securities rules that apply to Grayscale products such as GBTC, affiliates are unable to sell more than 1% of shares outstanding every three months, according to Craig Salm, chief legal officer at Grayscale. In this case, DCG would be an affiliate.

Some GBTC shareholders might root for a dissolution of the trust and distribution of the underlying assets as a way to recoup the discount. But it is very hard to see that as a potential or likely outcome. GBTC is a lucrative business with captive customers, charging 2% of the assets a year of the fund as fees. At the current level, that means more than $200 million annually. Moreover, even if it were possible, making so many bitcoins available for sale at once could dent the cryptocurrency’s price and any profit potential.

But Grayscale has pursued another path to closing the discount—conversion of GBTC into an exchange-traded fund. An ETF allows creation and redemption of shares seamlessly, so any gap would be arbitraged away. The SEC has rejected an application for ETF conversion thus far. Grayscale is suing the regulator in the U.S. Court of Appeals for the District of Columbia Circuit.

Buying GBTC can partly be a bet on how that process goes, and on Washington’s regulatory view in general. Maybe recent events will harden political opposition to legitimizing crypto by regulating it. But there might also be a shift to favor the view that regulating crypto is the best way to protect customers from things such as the debacle at FTX, and that vehicles such as ETFs are safer alternatives.

Some of the recent rise in the discount likely could reflect investors’ general worries about crypto turmoil following the collapse of FTX. DCG is also the owner of cryptocurrency lending provider Genesis, which suspended customer withdrawals in November and has sought to raise money, The Wall Street Journal has reported.

Regardless of what happens with Grayscale and its corporate siblings and parent, though, it is important to note that the bitcoin trust is a separate legal entity. Grayscale said in mid-November that it is “prohibited from encumbering the digital assets underlying its products." GBTC is a Securities and Exchange Commission-reporting trust with an independent custody account with Coinbase Global. Coinbase has vouched for these coins, which it said are segregated in “cold storage."

So is there a bonanza to be had? Investors bullish on bitcoin can still bet on its long-term rise via GBTC. Bold traders who have no interest in betting on bitcoin’s direction might see an opportunity to go short or bet on a price decline for bitcoin while owning GBTC in order to make a clear bet on a narrowing of the fund’s discount. Yet that kind of two-step bet isn’t something for the casual investor—nor is it cheap.

There is no easy money to be made in crypto.

 

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