Grayscale, the US investment firm responsible for a mammoth $38.8 billion closed-end Bitcoin trust, has its sights trained on converting the fund into a Bitcoin Exchange-Traded Fund as soon as possible.
"We are 100% committed to converting GBTC into an ETF," said the firm in an announcement today, adding, "The timing will be driven by the regulatory environment.”
If Grayscale turns the Grayscale Bitcoin Trust into a Bitcoin ETF, Grayscale would charge lower management fees and it would be easier to move money in and out. The announcement restates Grayscale's long-time ambition to convert the trust into a Bitcoin ETF, reminding investors who are sick of Grayscale's management fees and concerned that its Bitcoin Trust has traded at a discount for a month straight that there's a light at the end of the tunnel.
How does Grayscale’s Bitcoin Trust work today?
The Grayscale Bitcoin Trust, launched in 2013, is similar in structure to a closed-end fund. Large institutional investors wire Grayscale some money (or some Bitcoin), then Grayscale invests that money into Bitcoin and sells shares in the trust on the stock market. It’s one of the only ways that US investors can gain exposure to Bitcoin through the stock market.
But the business model comes with a few disadvantages: First, Grayscale charges a hefty annual management fee of 2%. Second, institutions that bankroll the trust have to lock up their Bitcoin for a minimum of six months, meaning that their investments are highly illiquid.
This is of concern because, third, shares in the trust stray from the price of the Bitcoin they represent; usually, the shares in a trust trade at a premium to the price of Bitcoin, although in the past month straight they've traded at a discount.
If shares trade at a premium, shareholders are paying too much for their Bitcoin. If shares trade at a discount, institutional investors who borrowed a lot of Bitcoin to fund the trust will lose money if they want to sell their shares.
ETFs, on the other hand, are far cheaper to run and it's easier to withdraw money.
The main issue with a Bitcoin ETFs is that the US Securities and Exchange Commission has rejected all applications for them, claiming that the price of Bitcoin is vulnerable to manipulation. In 2016, Grayscale submitted its own application but withdrew it the following year in anticipation of rejection.
"Ultimately, we withdrew our application because we believed the regulatory environment for digital assets had not advanced to the point where such a product could successfully be brought to market," it said today.
However, a new administration, SEC chairman and successful Bitcoin ETFs in neighboring Canada have renewed excitement for a Bitcoin ETF in the US. Should the SEC approve those applications, the Grayscale Bitcoin Trust would seem expensive and cumbersome by comparison.
Grayscale said in its announcement today that its intention "has always been to convert these products into an ETF when permissible." Should the conversion take place, Grayscale will lower the management fee.