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A key metric known in crypto markets as the "Grayscale discount" is narrowing, possibly a sign of optimism on the part of some traders as the deadline approaches for the U.S. Securities and Exchange Commission to rule on a proposal to convert the Grayscale Bitcoin Trust – the world's largest cryptocurrency fund – into an exchange-traded fund.
The Grayscale Bitcoin Trust, often referred to by its stock-trading symbol GBTC, is a type of investment vehicle that allows U.S. investors to gain exposure to price movements of BTC.
Grayscale (whose parent company Digital Currency Group also owns CoinDesk) has applied to convert the GBTC into an exchange-traded fund, or ETF. And for months, some traders have been monitoring the discount as a proxy for the likelihood of winning approval. According to the market logic, the GBTC would trade at par with the underlying bitcoin in the fund if the conversion goes forward; in other words, the discount would evaporate.
And lately, it has been narrowing.
The GBTC shares are currently trading at a discount of 29% to bitcoin’s price, according to data from Skew. That's down from 34% last week. The shares have been trading at a discount since February 2021; previously, the shares had traded at a premium to the bitcoin price.
Pablo Jodar, financial products manager at Storm Partners, a systems provider for the cryptocurrency space in Europe, said that as the discount narrows, hedge funds are using GBTC as an arbitrage tool to benefit from the price convergence between GBTC and BTC.
“The stock price is coming closer to the net asset value (NAV) of the underlying assets, meaning the market could have turned more positive on BTC,” said Jodar.
Some analysts are also attributing the discount to people betting on the spot ETF conversion approval. Grayscale has been lobbying heavily for the SEC approval – coupled with a marketing campaign that appears designed to sway public opinion; this week, blurbs sponsored by Grayscale describing a spot bitcoin ETF as "critical" ran in the financial-industry newsletter Politico Morning Money.
Officials from Grayscale and another investment firm, Bitwise, said at CoinDesk's Consensus 2022 conference earlier this month that they are optimistic the spot ETF will finally be approved by the SEC soon. In October 2021 Grayscale initially applied to convert its GBTC into a spot ETF. The SEC has since pushed off a decision, but currently plans to render a verdict by July 6.
Grayscale also met with the SEC in early May to better make its case for turning the GBTC into a spot bitcoin ETF.
“We remain encouraged by the SEC's actions over the past eight months, which have signaled an increased recognition of and comfort with the maturity of the underlying bitcoin market," Michael Sonnenshein, CEO of Grayscale, said in an email to CoinDesk forwarded by a representative.
"The approval of each and every bitcoin-linked investment product strengthens our arguments about why the U.S. market deserves a spot bitcoin ETF," Sonnenshein added.
As the discount narrows, according to data from Skew, GBTC trading volume hit a seven-month high.
Sean Farrell, Fundstrat Global Advisors’ head of digital-asset strategy, said that another factor worth considering is the crash of the crypto hedge fund Three Arrows Capital (3AC). The fund suffered heavy losses in the recent market downturn.
“They were large holders of GBTC before last week,” said Farrell. “Having that sell-pressure out of the picture probably gave whoever stepped in here some added confidence that the overall downside for GBTC is greatly reduced.”