Grayscale’s ETF Push Highlights Existential Threat to GBTC Dominance

For seven years, Grayscale Investments’ bitcoin trust has been nearly the only game in town for investors who wanted to bet on bitcoin’s price without the fuss of handling cryptocurrency.

Lately that’s been changing fast. From alternatives like Osprey’s bitcoin fund to Bitwise’s cryptocurrency index to Canadian bitcoin exchange-traded funds (ETFs), investors now have more choices for hassle-free bitcoin exposure. Arguably, MicroStrategy and even Tesla shares might scratch the itch now.

The once-sizable premium over the price of bitcoin for shares in the Grayscale Bitcoin Trust (GBTC) has flipped to a discount, reflecting a drop in demand for the vehicle.

“I don’t think we’re going to see 40% to 50% premiums again like in 2017,” said crypto analyst Kevin Rooke. “There is institutional awareness now,” he said, “and so many ways to get the same exposure.”

And if the U.S. Securities and Exchange Commission approves a bitcoin exchange-traded fund (ETF) this year, the Grayscale Bitcoin Trust (GBTC) might end up marginalized as the obsolete legacy of a regulatory regime that has since passed.  

“If we have a Bitcoin ETF in the U.S., there probably will be no more inflows into any bitcoin trust,” said Steven McClurg, chief investment officer of Valkyrie Digital Assets, which has its own pending proposal for a bitcoin ETF. 

Grayscale clearly sees the writing on the wall. Far from sitting on its hands, the investment manager (which, like CoinDesk, is owned by Digital Currency Group) has been buying back GBTC shares, helping to stabilize the price. Perhaps more significantly, the firm is hiring specialists to compete in the bitcoin ETF space.

“Grayscale is continuously exploring new opportunities, such as an ETF, in response to customer demand,” said Grayscale CEO Michael Sonnenshein. “We were the first to provide exposure to a digital asset through a regulated wrapper, and our goal is to ensure that we lead the market in whatever future product we bring forward as well.”

Read more: Grayscale, Firm Behind Leading Bitcoin Trust, Is Hiring ETF Specialists

Such adaptive measures show how rapidly the bitcoin market structure is changing as the price trades near all-time highs and the mainstream investors Grayscale has been courting for years are arriving in greater numbers than before. Firms are now adding millions of dollars worth of bitcoin to their corporate treasuries, institutions are buying more bitcoin than what’s being mined, and Goldman Sachs plans to relaunch its crypto trading desk after a three-year hiatus.

Grayscale’s ETF Push Highlights Existential Threat to GBTC Dominance
The "Grayscale premium," measuring the difference between market bitcoin prices and the price implied by the GBTC share price, has flipped negative recently.
Source: Skew.

Hypothetically, the investment manager could convert GBTC into an ETF, but it would be expensive compared to others already on the market under the current fee structure. CI Global Asset Management has advertised that its Canadian bitcoin ETF would have a 0.4% annual fee. 

Grayscale could instead create a bitcoin ETF that’s secondary to GBTC but with a lower fee than GBTC’s current 2% annual fee, said James Seyffart, ETF research analyst at Bloomberg Intelligence. (With around $36 billion in assets under management, Grayscale rakes in around $700 million annually, Seyffart said.)

This would give Grayscale some wiggle room to convert GBTC into an ETF, giving it the opportunity to create one of the most liquid bitcoin funds in the world, Seyffart added, but the investment manager would have to act fast. Seyffart said he’s become less confident now that Grayscale can hold onto institutional investors after seeing trading volumes soar on Canada’s bitcoin ETFs.

There’s also the possibility that as more institutional investors become comfortable with cryptocurrencies, they’re willing to hold bitcoin directly, instead of doing so through a fee-heavy investment vehicle, Seffyart added.

“People are less interested in holding money in GBTC and want to hold bitcoin themselves,” he said. 

Grayscale’s competitive moat is shrinking as rival offerings attract investor money, amid speculation the SEC might be moving to approve a bitcoin ETF.

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