How To Buy $1 Worth Of Bitcoin For 85¢

How To Buy $1 Worth Of Bitcoin For 85¢
Stéphane Renevier, CFA

over 2 years ago4 mins

  • Grayscale Bitcoin Trust is currently trading at a discount to the value of bitcoin it holds.

  • And now that Grayscale has filed to convert it into an ETF, there’s a unique opportunity: buy GBTC at a discount, and wait for it to snap back to market value.

  • Of course, the discount could widen if regulators don't authorize the conversion, and the price of bitcoin could go down too.

Grayscale Bitcoin Trust is currently trading at a discount to the value of bitcoin it holds.

And now that Grayscale has filed to convert it into an ETF, there’s a unique opportunity: buy GBTC at a discount, and wait for it to snap back to market value.

Of course, the discount could widen if regulators don't authorize the conversion, and the price of bitcoin could go down too.

Crypto specialist Grayscale has some exciting news: it’s filed to convert its “Grayscale Bitcoin Trust” (GBTC) into an exchange-traded fund (ETF). And if regulators give it the go-ahead, GBTC – currently trading at a 15% discount to bitcoin’s market value – could suddenly snap back in line with the OG cryptocurrency. That’s where you come in…

Why is Grayscale Bitcoin Trust currently trading at a discount?

Plenty of investors see GBTC as an ETF, but that’s not actually the case.

See, normal ETFs have “authorized participants” that can trade the underlying assets for the shares they represent at market value. The role of those participants is important: by creating or redeeming shares, they make sure that the market price of the ETF is trading in line with its net asset value.

GBTC is different: it allows investors to gain exposure to bitcoin through a private trust. And while investors can buy and sell shares in the secondary market, there aren’t any market makers to make sure the price of GBTC and the value of the bitcoin held by GBTC are the same. There’s not even any share redemption program, which makes GBTC’s price highly dependent on demand for shares, and explains why it can deviate so much from its net asset value.

The price can deviate significantly from its net asset value. Source: Ychart
The price can deviate significantly from its net asset value. Source: Ychart

As you can see in this chart, GBTC shares have generally traded at a premium to their net asset value, which means investors were paying as much as $1.30 to hold $1 of bitcoin. That was good news for professional traders: it created a massive “premium arbitrage” opportunity, where, say, hedge funds could borrow bitcoins, exchange them for the marked-up GBTC shares, and – after a six-month lockup period – sell them in the secondary market to pocket the difference between the two.

But since the second quarter of this year, that premium has turned into a 15% discount where investors are paying 85 cents to hold $1 of bitcoin. And the unravelling of the premium arbitrage trade has a lot to do with it: demand for GBTC has slowed down as more and simpler options to buy bitcoin (like the ProShares Bitcoin Strategy ETF) have become available, which has in turn pushed arbitrage traders to exit their (now-riskier) positions at the same time. With arbitrageurs gone and no way for investors to redeem their shares, the imbalance of supply and demand has led GBTC’s shares to trade at a discount to its bitcoin holding.

So what’s the opportunity here?

Here’s the thing: if Grayscale’s request to convert GBTC into an ETF is accepted by regulators, authorized participants will suddenly be able to arbitrage deviations to market value. Put simply, that discount is likely to disappear.

So the trade is pretty simple: buy GBTC today and wait for the trust to convert into an ETF. Your returns will track bitcoin’s potential gains, plus an extra 15% when the discount evaporates. And while there’s no known timeline for a decision by the regulators, it’s expected to happen before the end of the year, meaning that you could realize this attractive gain in a relatively short period of time.

What are the risks?

The biggest is that regulators don’t approve the conversion, which is certainly possible. The ETFs that have been approved so far are based on futures contracts – that is, derivatives contracts that speculate on bitcoin’s price, rather than on the cryptocurrency itself. But a GBTC ETF would be physically backed, meaning the US regulator has to assess market manipulation and counterparty risk in crypto markets that are completely outside of its direct control. If regulators don’t approve the conversion, the discount could expand further, leading you to incur additional losses.

There’s also no guarantee the price of bitcoin won’t go down. Of course, you could hedge that risk by shorting bitcoin: either through futures or CFDs, or by using margin on a crypto exchange. But those options not only have risks of their own, they also come with extra costs and complexity, which arguably only makes them an option for more experienced investors.

Is the GBTC trade right for me?

Let me be clear: this isn’t a risk-free “arbitrage” opportunity. Bitcoin is a highly volatile asset and the discount could very well expand further. But for those who planned to invest more in bitcoin anyway, I think it’s an interesting trade and the potential benefits could outweigh the risks.

What’s more, there’s still the possibility that any rejection is only temporary, and that regulators will eventually allow it. The mere existence of that possibility should limit how much the discount will expand, as buyers who expect its approval to be a “when” rather than an “if” step in.

That leads me to a third possibility: if you think it’s too soon for regulators to accept a GBTC ETF but think they eventually will, you could simply wait for the discount to expand before buying in. Just be aware: the extra return you can make in this case comes at the risk of missing the opportunity altogether…

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Disclaimer: These articles are provided for information purposes only. Occasionally, an opinion about whether to buy or sell a specific investment may be provided. The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment advisor.

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