Why A Grayscale Bitcoin ETF Approval Could Have Bearish Results

The Grayscale Bitcoin has no doubt been a game-changer in the bitcoin space when it comes to providing indirect exposure to the digital asset. However, the success, or failure, of this fund has been one that has had investors gnashing their teeth in recent times. With the Three Arrows Capital (3AC) collapse, the discount that has rocked the fund has deepened even further, creating both a bad outcome and a possible opportunity for its investors.

How 3AC Affected The GBTC

The crash of 3AC has been one that has been widely analyzed in the bitcoin space. The leading cryptocurrency management fund had found itself in a tough spot after a number of investments had gone wrong, namely the Terra collapse. Given that 3AC had significant holdings in the Grayscale GBTC, its collapse has adversely affected the fund.

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The GBTC had been trading for a discount for the better part of a year but this discount has gotten significantly larger with the 3AC crash. The management firm had been the largest shareholder with a reported holding of 38.9 million shares. It has also been one of the investments 3AC had tried to use to mitigate the collapse of the firm. 

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3AC had earlier laid a pout a playing to arb the GBTC discount before the SEC’s decision on the approval or denial of the Grayscale ETF filing. It had attempted to offload its shareholdings to external investors when the collapse was imminent. Basically, 3AC had put forward that they could long the GBTC and then provide a hedge for it by shorting Bitcoin which would be facilitated with a 20% performance fee.


GBTC discount grows to 34% | Source: Arcane Research

It is still unclear the size of 3AC’s current investment in GBTC but it is reportedly a large position. There are no reports on if 3AC had successfully been able to offload to external investors and execute the trade but its impact on the fund is quite open. The GBTC is currently trading at a 34% discount after 3AC collapsed.

Opportunity For Bitcoin Investors

With such a large margin in the GBTC discount, it has presented a unique opportunity for investors. It is no secret that there are some investors in the traditional finance sectors who want a piece of the bitcoin pie but are not willing to have any direct exposure to the digital asset itself. As such, GBTC trading at a 34% discount opens up the opportunity for long-term investment.

Grayscale’s annual management fee is currently at 2%. As such, its current 34% discount is not sustainable. Its current ETF filing with the SEC is expected to be rejected but for the fund to stay at such discounts, its ETF filings would need to be repeatedly rejected for a period of 20 years and that is very unlikely to be the case. Hence, buying at such rates is basically an opportunity to accumulate for investors.

Bitcoin price chart from TradingView.com

GBTC discount grows as BTC price struggles | Source: BTCUSD on TradingView.com

However, it should also be noted that while a rejection of the ETF filing is expected, approval is also a likely outcome. If the latter were the case, it would be a negative as this would actually create pressure on the sellers as funds would see this as an opening for massive arbitrage in a cash-neutral long GBTC and short BTC trade. So, it will be in the best interest of GBTC investors now for the ETF filing to be rejected.

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The deadline for the ETF approval by the SEC is on Wednesday, July 6th, about two weeks from now. The Bitwise verdict will happen a week before this so it is likely that the decision of the SEC regarding this would actually indicate what the Grayscale decision would be.

Featured image from CryptoPotato, charts from Arcane Research and TradingView.com

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