Grayscale’s GBTC: what it is and how it works

Grayscale Investments is the financial product of Stamford which has been operating in the sector of investments in digital currencies since September 2013. The Connecticut-based (but New York-based) asset manager quickly became the largest cryptocurrency fund in the world with the launch of Grayscale ‘s GBTC , officially known as the Grayscale Bitcoin Trust. Not only.

The company achieved another first when it became the first crypto company to take the SEC (Securities and Exchange Commission), the federal supervisory and control body of the US stock exchange, to court. But what exactly is the GBTC and why did Grayscale, whose largest shareholder is Barry Silbert’s Digital Currency Group with a 4.1% stake, decide to challenge the American watchdog led by chairman Gary Gensler?

Grayscale’s GBTC: What is the Bitcoin trust

GBTC is a publicly traded security on the OTCQX over-the-counter market that offers institutional investors the ability to gain passive exposure to Bitcoin without having to buy, hold and custody the cryptocurrency directly. On the other hand, by statute, accredited investors cannot place funds in markets that are not yet regulated such as the crypto market.

The objective of investing in Grayscale is to have the value of the shares reflect the performance of the price of Bitcoin , after deducting fees and expenses. The benefits of investing in BTC through the fund are listed in the asset manager’s fact sheet : having titled and verifiable ownership (shares are held in the investor’s name and insured), an asset eligible for tax-advantaged accounts, and solid and reliable storage.

In 2013, the universe of blockchain and the cryptographic ecosystem were relatively unexplored and Grayscale took advantage of the low competition on the market to raise numerous investments from different operators, so as to reach $10.8 billion and in October 2021 even to almost 40 billion.

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In the second quarter of 2021, the Rothschild Investment Corporation of Chicago also added 141,405 shares of the Trust to its portfolio . A few months later, Morgan Stanley bought over 6.5 million shares of GBTC for a total value of $240 million, becoming the fund’s second largest investor. One of the best known and most active realities in the fund is ARK Investment Management , the creation of Cathie Wood.

Grayscale’s GBTC: how the fund works

Approved by the SEC, Grayscale collects money from investors (the minimum investment is $50,000) and uses it to buy Bitcoin: today it owns 3.5% of those present globally. According to research by independent analyst Ergo of OXT Research, Grayscale holds 633,000 BTC. The shares are distributed through private placement sales and become eligible for sale on the public market after a legal holding period of six months. Therefore, it is stocks and not BTC that are bought, sold and traded.

Bitcoins are entered and held in the fund: GBTC is at a discount when its price at the NAV (Net Asset Value) of the current Bitcoin price is negative; it is at a premium when the price at the NAV is positive. GBTC is consistently trading at a fairly large discount to the spot price of the Bitcoins it holds: its NAV has hovered around 40% for some time.

Investments in GBTC are obviously speculative and involve a high degree of risk, including the partial or total loss of invested funds, especially as Grayscale does not operate a redemption program. Typically, as noted, GBTC’s shares trade at a premium to its underlying asset. The annual BTC custody fee is 2% and accrues day by day.

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Everything changed when the first ETFs (Exchange Traded Funds) and many other alternative instruments based on Bitcoin spot prices arrived in Canada, a phenomenon that is prohibited in the United States. At that point, investors began to walk away from Grayscale (dropping the stock much lower than its NAV) and the fund asked the SEC to convert the Bitcoin Trust into an ETF.

Why Grayscale is suing the SEC

The US regulator has rejected all of Grayscale’s applications to convert the GBTC into an exchange-traded fund . The transition to ETFs on the spot price of Bitcoin would also allow for the adoption of FINRA (Financial Industry Regulatory Authority) Regulation M and the consequent relief for investors.

The reasons for the Securities and Exchange Commission’s pushbacks and the reactions of the asset manager (who promises a petition to the District of Columbia Court of Appeals to challenge the SEC’s rulings) are illustrated in this article. By now the erosion of demand has led to a widening of the spread between the NAV and the market value of the Trust.

The Stock Exchange Authority’s resounding no to Grayscale’s request caused Bitcoin prices to drop to $19,000. It went even worse with the FTX crack : when the exchange of the young Sam Bankman-Fried filed for bankruptcy in the Delaware Court, GBTC shares lost 10% and the future of the largest investment trust in Bitcoin looks very hazy.