Traders weigh how to play narrowing GBTC discount

Bitcoin ETF prospects got a boost in court on Tuesday, leading Grayscale Investments’ flagship trust to jump 17% as traders weigh outcome

article-image

Ascannio/Shutterstock, modified by Blockworks

share

As the final quarter of the year approaches, all eyes are on the outcome of Grayscale Investments’ year-long lawsuit against the SEC. 

A three-judge panel for the DC Circuit Court of Appeals sided with Grayscale Tuesday. The regulator now has to review the asset manager’s application to convert its flagship product into a spot bitcoin ETF. Though there’s no guarantee the SEC would approve it.

The influx of GBTC trading marked its biggest volume trading day, as denominated in value, since June 21, 2022, Blockworks reported.

Grayscale, which lodged its complaint in June last year, asserts that it has been unfairly discriminated against by the regulator. Grayscale’s argument is primarily based on the perceived bias in the SEC’s approval process, favoring ETFs that invest in bitcoin futures.

However, the SEC has failed to extend the same approvals for ETPs that directly invest in the asset — the latter of which includes Grayscale’s Bitcoin Trust (GBTC), which aims to evolve into a similar offering. 

“Products like Grayscale’s holdings have converted to ETFs in other commodity markets, and it makes no sense to treat crypto differently,” Greg Moritz, Chief Operating Officer at AltTab Capital told Blockworks.

“Rules for financial markets need to be based on data, not arbitrary and capricious sentiment toward a legitimate and growing asset class.”

Earlier developments triggered Bloomberg’s ETF analysts, James Seyffart and Eric Balchunas, to revise their prediction for the approval of a bitcoin spot ETF in the US at the start of the month.

Chances of approval have risen sharply, according to the pair, jumping from a mere 1% a few months ago and 50% a few weeks prior, to their current projection of 65%.

“The lynchpin for this current thesis is a Grayscale victory over the SEC in Federal court which could set things up for a wave of SEC approvals sometime in the fourth quarter,” Seyffart tweeted earlier this month. “All depends on how much [SEC chair] Gensler wants to fight here.”

Seyffart has previously predicted a 70% probability of Grayscale winning its lawsuit against the SEC, an outcome that could set a precedent for the approval of multiple bitcoin spot ETFs.

Trading on a prayer

Market participants have begun betting on that outcome as evidenced by an increasingly popular trade, Michael Rinko, research analyst at Delphi Digital told Blockworks.

“If you’re bullish on the odds of a bitcoin ETF approval, one way to play it is to long GBTC and short BTC perps,” he said. This involves buying GBTC in hopes its price will rise and at the same time betting that bitcoin perpetual contracts will fall in value.

Rinko said a trade that caps both the upside and downside while only betting on the discount to narrow “makes sense” given the balance of probabilities with respect to potential ETF approvals and Grayscale’s possible victory in court.

TradingView of GBTC discount
GBTC discount has been negative since early 2021

GBTC is currently trading at a discount, with the price of one share being lower than the value of the bitcoin it represents. This situation, Rinko explained, arises from GBTC’s structure as a trust issuing shares that represent a fraction of the underlying bitcoin — the net asset value (NAV).

The GBTC discount or premium is driven by supply and demand dynamics in the market. A premium occurs when more investors are buying GBTC shares than there are shares available for sale, pushing the market price above the value of the underlying bitcoin held by the trust. 

A discount, meanwhile, occurs when there are more sellers than buyers, causing the market price to fall below the NAV. 

Le Shi, head of trading at market making and algorithmic trading firm Auros told Blockworks that while there was no certainty surrounding the court case, going long on GBTC while shorting BTC perpetuals was a “viable” strategy.

“The GBTC leg still trades at a 15-20% discount to NAV, which even if realized over a year is still an attractive rate of return,” Shi said. 

“The perp hedge itself will also provide a modest positive yield, in the order of 6-8%, so now is arguably the best time to jump onto this for traders who have a sufficiently long time horizon.”

Historically, GBTC has traded at a premium, as it offered one of the few channels for traditional financial investors to gain exposure to the world’s largest digital asset. In recent times, as more sophisticated products have come to market for digital assets, the demand for GBTC has lessened.

As a result, the premium switched to a discount more than two years ago. That has begun to narrow in recent months, with the current discount reaching levels not seen since May of last year, suggesting elevated buying of GBTC.

“The discount started to narrow right after Blackrock announced its ETF application,” Rinko said. “So we can say with some confidence that elevated GBTC buying is likely driven by the market hoping for an ETF approval.”


Start your day with top crypto insights from David Canellis and Katherine Ross. Subscribe to the Empire newsletter.

The Lightspeed newsletter is all things Solana, in your inbox, every day. Subscribe to daily Solana news from Jack Kubinec and Jeff Albus.

Tags

Upcoming Events

Salt Lake City, UT

MON - TUES, OCT. 7 - 8, 2023

Blockworks and Bankless in collaboration with buidlbox are excited to announce the second installment of the Permissionless Hackathon – taking place October 7-8 in Salt Lake City, Utah. We’ve partnered with buidlbox to bring together the brightest minds in crypto for […]

Salt Lake City, UT

WED - FRI, OCTOBER 9 - 11, 2024

Pack your bags, anon — we’re heading west! Join us in the beautiful Salt Lake City for the third installment of Permissionless. Come for the alpha, stay for the fresh air. Permissionless III promises unforgettable panels, killer networking opportunities, and mountains […]

recent research

Research Report Cover Vertex.jpg

Research

The proliferation of new perp DEXs has led to fragmented liquidity across various DEXs and chains. Vertex, known for its vertically-integrated DEX that includes spot, perpetual, and integrated money markets, is now tackling cross-chain liquidity fragmentation through horizontal integration with the launch of new Edge instances. Vertex's integrated offerings and cross-margined account structure amplify the benefits of new instances: native cross-chain spot trading, optimized cross-chain basis trading, consistent interest rates, reduced bridging friction, and more.

article-image

Partnering with EtherFi and Angle, the fully on-chain perp DEX features bespoke collateral

article-image

Sponsored

Gavin Wood introduced the next evolutionary step for the Polkadot network: the Join-Accumulate Machine, or JAM

article-image

The side events were the places to be at Consensus 2024, according to attendees

article-image

Also, who’s come out swinging in the spot ether ETF fee war — and who could undercut them

article-image

I know it is not in their nature, but US regulators could learn a lot by researching the digital asset frameworks that overseas regulators have already gotten right

article-image

Also, the ETF hype train can count out at least one member