Grayscale’s bitcoin fund (GBTC), the largest bitcoin investment vehicle, has seen its discount to net asset value (NAV) shrink to 0% for the first time since February 2021.
This comes as the company got the all clear from the U.S. Securities and Exchange Commission on Wednesday to convert the fund into a spot bitcoin exchange traded-fund (ETF), which began trading on Thursday morning (alongside 10 other ETFs).
The fund had traded at a discount to the price of the Bitcoin it held since February 2021 and hit record lows of nearly 50% in December 2022. GBTC’s discount to NAV began to narrow significantly as the expectations of an ETF approval surfaced last summer and also on rising bitcoin sentiment.
Prior to the SEC’s approval to convert the fund into an ETF, the discount had fallen to as low as 5.6% on Monday.
“GBTC converging to NAV is a huge relief for the space and a symbol of the industry’s move into a new stage of maturation,” said Sean Farrell, head of digital asset strategy at FundStrat.
“This product GBTC caused a lot of unnecessary pain over the past few years for obvious reasons,” said Farrell.
Fund Structure
The reason behind the discount was due to the nature of the fund. GBTC acted similar to a closed-end fund, which meant it lacked the inherent arbitrage mechanism that enables market makers to create or redeem shares at their discretion.
“The bitcoin always existed in the trust but the lack of a redemption mechanism led to the massive discount to the underlying asset value,” explained Farrell. “Most importantly this hurt a lot of individual investors as they underperformed the benchmark but also led to massive credit blowups since the product was used as collateral throughout the space.”
Previously, liquidity was only available over-the-counter in the secondary market, but now that the fund has been converted to an ETF, Authorized Participants are able to create and redeem ETF shares at NAV, tethering the market price of the ETF to its NAV, said Matt Kunke, crypto research analyst at GSR, in an interview with CoinDesk.
“As a result, the premium/discount will likely only vary by a few basis points from par moving forward,” added Kunke.
Looking forward, Farrell noted that it will be interesting to see how the discounts to NAV on Grayscale’s Ethereum Trust (ETHE) performs now that the probability of an eventual spot ether ETF approval has risen.
“Chances are the discount closes quickly,” said Farrell.
