- Over the years, the U.S. Securities and Exchange Commission (SEC) has rejected every spot Bitcoin ETF application, with the latest rejection being for the VanEck Bitcoin Trust on March 10, 2023.
- Interestingly, after the announcement of BlackRock’s ETF application, GBTC saw an increase of over 40%.
- While the potential approval of a spot Bitcoin ETF may initially seem bullish, it could have short-term negative effects on the price of BTC.
Recently, the increasing number of spot Bitcoin ETFs has generated a significant amount of positive sentiment in the cryptocurrency market, but the real question is: Can these ETFs create pressure on the price?
Approval of Bitcoin ETFs Could Suppress the Price
Over the years, the U.S. Securities and Exchange Commission (SEC) has rejected every spot Bitcoin ETF application, with the latest rejection being for the VanEck Bitcoin Trust on March 10, 2023. The SEC concluded that the proposal did not have a “comprehensive surveillance sharing agreement in place with a regulated market of significant size related to spot Bitcoin.”
Investors now believe that the attempts by ARK Investment and BlackRock to launch spot Bitcoin ETFs could be a solution for the publicly traded Grayscale Bitcoin Trust (GBTC).
Interestingly, after the announcement of BlackRock’s ETF application, GBTC saw an increase of over 40%. However, while the potential approval of a spot Bitcoin ETF may initially seem bullish, it could have short-term negative effects on the price of BTC.
What is an ETF?
An ETF is a type of security that holds various underlying investments such as commodities, stocks, and bonds. An ETF can be similar to an investment fund that brings together and manages the given assets.
The most well-known example of this instrument is the SPY ETF, which tracks the S&P500 index. State Street manages the $436 billion assets of this investment fund.
Buying an ETF gives investors direct ownership of the fund’s contents, which results in different tax consequences compared to obtaining futures contracts or leveraged positions. While spot Bitcoin ETFs have been rejected, similar products have been available for decades for bonds, global currencies, gold, Chinese stocks, real estate, and oil.
GBTC’s 30% Discount
The Grayscale Bitcoin Trust (GBTC), with managed assets worth $18.4 billion, is currently trading at a discount of 30% compared to Bitcoin assets. The difference between GBTC shares traded on regular exchanges and the 626,778 Bitcoins in the fund’s market value has dropped to as low as -49% in December 2022.
Therefore, this discount is likely due to the lack of an instrument that allows arbitrage. Despite being classified as a closed-end fund with a limited number of available shares, Grayscale’s GBTC is unquestionably a leader in the cryptocurrency market.
GBTC shares are not freely created, and there is no buyback plan. Due to this lack of activity, significant price differences exist when compared to the fund’s actual Bitcoin assets. In contrast, an ETF provides market makers with the ability to create and redeem shares, resulting in generally small premiums or discounts.
While GBTC charges a fixed 2% annual management fee, the discount may be acceptable due to the SEC’s continued rejection of all fund managers’ applications and requests.
On the other hand, unlike GBTC, ETFs typically trade at net asset value. For example, the Purpose Bitcoin ETF (BTCC.U) had a net asset value of $5.63 per share on June 27 and closed at $5.65 on the Toronto Stock Exchange.
Similarly, the underlying price of the ProShares Bitcoin Strategy ETF (BITO) in the U.S. futures was $16.89 on June 28, and its shares traded at $16.89.
Approval of Spot Bitcoin ETF Could Initially Create Pressure on BTC
In summary, a trust investment product is much less desirable than an ETF, and Grayscale has done little to mitigate the impact on GBTC investors so far. However, after the world’s largest asset manager, BlackRock, announced its application to launch a Bitcoin spot price ETF, market sensitivity partially improved.
The share price will eventually approach zero based on its underlying content as the SEC allows asset manager Grayscale to convert GBTC Trust into a real Bitcoin ETF, creating buybacks and arbitrage opportunities.
In this scenario, the question arises as to how much of the $18 billion fund will flow into other Bitcoin-related instruments or be sold on the market.
In any case, the approval of a spot Bitcoin ETF is likely to create significant selling pressure with the re-entry of BTC, which has been locked for 3-8 years due to the GBTC conversion.
