Grayscale Wants to Turn Giant Bitcoin Fund into an ETF. Why is it a big deal?

By Evie Liu | BarronsGrayscale Investments, manager of the world’s largest publicly traded Bitcoin fund, said it intends to convert the $34 billion trust into an ETF when regulators allow it to, a move that could preserve its advantage in cryptocurrency investing as other firms seek to make similar moves.

“This is a subject that Grayscale has been examining closely from both a commercial and regulatory perspective for several years,” the company wrote in a Monday post.

Grayscale, a subsidiary of Digital Currency Group (ticker: DCG), was a pioneer in digital-asset management. It launched the Grayscale Bitcoin Trust (GBTC) in 2013 and many more crypto products, such as the Grayscale Ethereum Trust (ETHE), in the following years.

The news came as the Bitcoin Trust has been trading at a discount to its net asset value for more than 30 days, an unprecedented reversal of the pattern since the closed-end fund hit the market in September 2013.

U.S. regulators haven’t approved any Bitcoin exchange-traded funds, so the Grayscale Trust has been one of the few options for people who want exposure to Bitcoin via the stock market. High demand and limited supply meant units of the fund were bid up to more than the value of their portion of the Bitcoin held by the trust.

The recent discount on Grayscale shares suggests that investors have been selling their positions in the trust, likely in anticipation of the upcoming approval of Bitcoin ETF s. Those funds are expected to charge much less than Grayscale’s 2% management fee, which is significantly higher than most index ETFs or commodity-backed funds. It even surpasses the cost of many actively managed funds.

The company said in its Monday announcement that the management fee will be reduced if the fund converts to an ETF, but it didn’t disclose the new number.

The Grayscale Trust has other disadvantages as well, compared with a Bitcoin ETF. Investors who subscribe to new shares issued by the fund have to wait for six months before they can trade that stock on the secondary market, while investors in ETFs don’t face that kind of restriction.

The fund’s price discrepancy relative to Bitcoin–-–sometimes pretty large–-–is also undesirable for investors who want to track the digital currency’s performance without the impact of other factors. Market makers can freely create and redeem shares of ETFS, so any differences between their prices and the value of the underlying assets is immediately arbitraged away.

In any case, Grayscale may not be the only game in town for long. Investors have been eagerly waiting for a U.S.-listed Bitcoin ETF, which would allow individuals, financial advisors, and institutional investors easy access to the digital assets in the form of a security. While anyone can buy and own Bitcoins today, it remains hard for regular investors with brokerage accounts to manage cryptocurrencies as part of their portfolios.

Canada authorized its first Bitcoin ETFs in February, and a few more in the following weeks. The first and largest one, Purpose Bitcoin ETF (BTCC), has amassed $1.2 billion in assets under management just two months after it started trading.

In the U.S., a handful of companies have sought approval for Bitcoin ETFs from the Securities and Exchange Commission, but most have either withdrawn their proposals or had them rejected. The agency has said it was concerned about volatility, price transparency, and potential fraud and manipulation in crypto markets.

Grayscale first submitted an application for a Bitcoin ETF in 2016, but later withdrew it. Companies that currently have active applications with the SEC include funds behemoth Fidelity Investments, VanEck, WisdomTree Investments (WETF), SkyBridge Capital, Valkyrie Digital Assets, and NYDIG Asset Management. A recent filing from Fidelity, particularly, has raised expectations for a U.S. Bitcoin ETF.

Grayscale, of course, isn’t going to sit tight and wait for its fund to become obsolete as ETFs emerge. To stay in the game, converting to an ETF when the regulatory environment allows seems only natural. Monday’s announcement, even with no formal filing, has the potential to help quell the bearish sentiment that has dragged Grayscale shares below their net asset value.

“We want to ensure all of our investors know that it’s completely 100% our intention to convert this product into an ETF,” Grayscale CEO Michael Sonnenshein told Barron’s.

If it wins approval, a Grayscale Bitcoin ETF would be much better positioned than potential rivals. The fund’s size, liquidity, and branding is unparalleled among investment products in the digital currency space.

If Bitcoin were a commodity, a Grayscale Bitcoin ETF at today’s size would be the world’s second-largest commodity ETF, ranking only behind the $57 billion SPDR Gold Trust (GLD). It would also be the third-most-liquid commodity ETF in terms of weekly trading volume, according to the firm. Only the SPDR Gold Trust and iShares Silver Trust (SLV) are larger.

In addition, the Grayscale Trust is already owned by star manager Cathie Wood’s ARK Investments Management. Many large institutions, including Morgan Stanley, also currently have indirect exposure to Bitcoin through the Grayscale fund. They will likely stay if the converted Grayscale ETF offers fees and services similar to those available from rivals.

“We are very confident in our positioning both in the market as well as our engagement with the regulators,” said Sonnenshein. The fund would also be the only one that has a record of conforming to SEC regulations regarding disclosure and other operations, he adds.

Existing shareholders in the Grayscale fund wouldn’t need to take any action if the conversion goes through, according to the firm. The fund currently only trades via the over-the-counter market, but if it were an ETF, it would be moved to national exchanges like the New York Stock Exchange and Nasdaq.

Shortly after the conversion, the price gap with Bitcoin–-–whether a premium or a discount at the time——would likely disappear. That means investors who bought the fund at a discount might see some gains regardless of the fluctuations in Bitcoin’s price.

The fund jumped 4.1% in Monday trading, while Bitcoin’s price only increased 1.3%, though units still trade at a discount to the cryptocurrency.

Copyright © Barrons


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