Traders weigh how to play narrowing GBTC discount

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.

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.”

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