Grayscale’s Michael Sonnenshein: A Bitcoin ETF Is What Investors Deserve

Morningstar analyst proposes redemption program for Grayscale Bitcoin Trust as it has traded at discount for much of 2021.


Michael Sonnenshein, CEO, Grayscale Investments; Blockworks exclusive art by axel rangel


key takeaways

  • Morningstar Analyst Bobby Blue says Grayscale should allow investors to trade in their discounted shares for the amount of bitcoin in the trust that the shares represent while firm waits to convert its bitcoin trust to an ETF
  • GBTC has returned 42% in 2021, as of Oct. 29, according to Morningstar data, which is less than half of bitcoin’s 95% return

An ETF that directly invests in bitcoin is what investors want and deserve, Grayscale Investments CEO Michael Sonnenshein said.

The comments come after Morningstar Analyst Bobby Blue wrote in a November 22 research note that Grayscale should institute a redemption program for its flagship bitcoin offering that has traded at a discount for a majority of the year.

The Grayscale Bitcoin Trust (GBTC) launched in 2013 and had $37.2 billion assets under management on Tuesday. Similar to a closed-end fund, GBTC is a grantor trust that invests directly and exclusively in bitcoin. 

The fund’s trust structure leads to persistent deviations between the price investors pay for shares and the actual value of those shares, Blue explained.

“There’s a lot more shares that investors want to sell than there is demand for it right now,” Blue told Blockworks. “There are other, cheaper, more efficient options available to investors and as those continue to proliferate, they’re going to look at this 2% expense ratio product and just say it’s just not doing it for me anymore.”

GBTC’s cost and limitations as a trust have led to substantial differences between the returns of the product and the returns of bitcoin itself. The offering has returned 42% in 2021, as of October 29, according to Morningstar data, which is less than half of bitcoin’s 95% return.

Bitcoin investors looking elsewhere

GBTC shares began trading at a discount to their net asset value in February, which was the month Canadian fund group Purpose Investments launched the world’s first bitcoin ETF on the Toronto Stock Exchange, Blue said.

The management fee of Purpose Investments’ product is half of that of GBTC, and the ETF gathered more than $1 billion in assets in its first month of trading.  

In an ETF, market makers are able to create and redeem shares to keep the net asset value in line with the price, Blue explained. The only entity able to create and remove shares from the market is Grayscale, which it does through private placements and redemptions that are only available periodically to accredited investors.

While the US Securities and Exchange Commission (SEC) has not yet approved a spot bitcoin ETF in the US, it has recently allowed ETFs that invest in bitcoin futures contracts to come to market. 

The ProShares Bitcoin Strategy (BITO) launched on October 19 and the Valkyrie Bitcoin Strategy ETF (BTF) came to market three days later. A similar offering by fund manager VanEck and a product by Global X that invests in bitcoin futures and the equity securities of blockchain companies became available to US investors earlier this month.  

“Grayscale was able to harvest a lot of assets being the first mover and the only mover for a number of years, but that’s starting to break down,” Blue said.

What’s the fix?

A Grayscale spokesperson told Blockworks in an email that an ETF is the most efficient way to resolve any discrepancy between the firm’s products’ share price and the net asset value.

Sonnenshein responded to a Morningstar post on Tuesday that shared Blue’s research note, alluding to Grayscale voluntarily making its products SEC reporting companies and the firm’s hiring of David LaValle as its global head of ETFs in August.

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“An ETF is what our investors want, and what we believe they deserve,” Sonnenshein wrote.

Grayscale officially filed to convert GBTC to an ETF on October 19, the same day that BITO launched. Such a conversion would lift the current price discount and propel shares higher toward the net asset value, Blue said. 

But it remains unclear when the SEC could approve an ETF that invests directly in bitcoin. The agency denied VanEck’s proposal for a spot bitcoin ETF on November 12, just before its 240-day review period of the planned product expired.

“In the meantime, investors’ best hope is for Grayscale to institute a redemption program,” Blue wrote in the note.

“Its failure to do so to this point explains the trust’s current dilemma, though the firm may be reluctant to pull that lever until there’s more clarity around a spot ETF.”

Grayscale had previously offered a redemption program but closed it in 2016 after the SEC charged it with violating a regulation preventing the firm from repurchasing shares at the same time that it is offering shares through private placements, Blue noted. But Grayscale is currently not offering new shares.

The firm’s parent company, Digital Currency Group, last month authorized the purchase of up to a total of $1 billion worth of shares of GBTC, increasing its prior authorization of buying up to $750 million. 

The timing, amount and value of share purchases will depend on levels of cash available, price and market conditions, the firm said in a statement at the time. The authorization may be expanded, modified or discontinued at any time.

“Repurchasing shares at the market price indeed creates demand for the shares, which typically helps narrow the spread,” Blue explained. “But the trust’s massive size is a hindrance, and thus far the repurchases haven’t made a visible dent.”

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