Shares of Grayscale's Bitcoin Trust (GBTC) have gained more than 17% since Friday as optimism around the company's efforts to convert the trust to an ETF grows.
As of Wednesday, GBTC traded at a 35.7% discount to the value of its bitcoin holdings, according to data from YCharts. That's up from a discount closer to 45% at the start of this month.
On Tuesday, the crypto asset manager delivered oral arguments in a Washington appellate court Tuesday in its lawsuit against the SEC for denying its application to convert the trust into a ETF that holds bitcoin.
Shares of GBTC had their largest trading day since Nov. 22 on Tuesday with just over 8 million units of the trust changing hands, according to a Grayscale spokeswoman.
A ruling for the case isn't expected until June at the earliest. However, Grayscale maintains winning the lawsuit against the SEC is the asset manager's best path for pulling shareholders back to a breakeven by allowing the trust to automatically create and redeem shares.
Following Tuesday's hearing Bloomberg Intelligence, which previously favored the SEC with a 60% chance of winning the case, flipped the odds in Grayscale's favor giving the asset manager a 70% likelihood of prevailing.
"We expect the court to vacate the SEC order rejecting Grayscale’s [ETF] application," James Seyffart, an ETF analyst with Bloomberg Intelligence, said in a Wednesday research note.
"Converting [GBTC to an ETF] would be a windfall for current GBTC holders and immediately bring relief to the overall industry," Sean Farrell, head of digital assets at Fundstrat, told Yahoo Finance.
If the trust is granted approval to convert to an ETF shares could be automatically redeemed and created. This would eliminate its discount, giving shareholders approximately $5.5 billion based on the current discount. In the anticipation of a positive ruling, Farrell said he expects the discount to continue to narrow as investors attempt to harvest the spread between GBTC’s market price and its net asset value (NAV).
"A victory for Grayscale would also be encouraging for any other cases against the SEC that the industry is facing," Farrell said.
Even if Grayscale wins its case, however, approval to convert its trust into an ETF is far from assured.
Language in such a court ruling may matter more than who wins, according to Bloomberg's Seyffart. The ruling could give the SEC the opportunity to reject Grayscale's application on different grounds or lock the agency into accepting it.
"We lean towards the former for now," Seyffart added.
There could also be "other structural issues for the product that could lead to rejection," according to Bruno Ramos de Sousa, U.S. head of crypto asset manager Hashdex.
To be sure, a conversion of one of the existing U.S.-listed bitcoin futures ETFs — or even a new product entirely — may have a better chance of succeeding with the SEC, de Sousa pointed out.
"A lot of other players are going to step," Seoyoung Kim, an associate professor with Santa Clara University's Leavey School of Business, told Yahoo Finance Live on Wednesday. For instance, other issuers could apply for a bitcoin ETF, and any approved ETF would also require "authorized participants" — or major institutional investors acting as market makers — for any such product, Kim explained.
"Considering the size of the U.S. ETF market and pent-up demand from investors, a spot bitcoin ETF in the U.S. would certainly change the face of the global bitcoin market," de Sousa said.
David Hollerith is a reporter for Yahoo Finance. Follow him on Twitter @DSHollers
Read the latest financial and business news from Yahoo Finance
