Cryptocurrency markets have been volatile in recent years, with the crypto winter crushing Bitcoin (BTC +0.93%) and many of its digital asset peers in 2022. However, Bitcoin has bounced back with a vengeance, and crypto investors are now pouring back into the market to take advantage of what they hope will be a sustained rebound in prices in the sector.
Part of what's fueling speculation about a long-term rise for Bitcoin is the prospect for the U.S. Securities and Exchange Commission to approve an exchange-traded fund that owns Bitcoin directly. Such a fund could have advantages over the current futures-based ETFs that are currently available.
But there's actually a fund that exists currently that owns spot Bitcoin. Grayscale Bitcoin Trust (GBTC +1.66%) has been around for years, and although it hasn't gotten regulatory approval from the SEC to be a true ETF, investors are increasingly optimistic that it could do so in the near future. If that happens, then early investors could actually get an unexpected double win.
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Key Data Points
The origins of Grayscale Bitcoin Trust
Grayscale originally created its Bitcoin trust to give investors a way to participate directly in the price changes of the Bitcoin cryptocurrency. Grayscale Bitcoin Trust offered shares to institutional and accredited investors without having to do a full registration process with the SEC. Grayscale then took that money and purchased Bitcoin with it. Each share, therefore, represented a fraction of a Bitcoin.
To be clear, though, Grayscale Bitcoin Trust was not set up like an ETF. Fund shareholders have no right to redeem their shares for actual Bitcoin. Even institutional investors lack the ability to buy and sell new shares on the open market in the same manner as ETF shares. In many ways, the trust more closely resembled a closed-end fund with a set number of shares -- particularly when Bitcoin prices tumbled and interest in cryptocurrency waned.
From premium to discount...
It's that locked-in aspect of Grayscale Bitcoin Trust that was so damaging to shareholders when crypto winter set in. At the beginning of 2021, demand for Bitcoin was so strong that investors were willing to pay 25% more for trust shares than the value of the proportional amount of Bitcoin each share represented. That was with Bitcoin at about $30,000, and the cryptocurrency would double to more than $60,000 within the first couple months of the year.
By the end of 2022, however, Bitcoin prices had sunk to $17,000. Even worse, Grayscale shares traded at a nearly 50% discount to the value of the underlying Bitcoin. As a result, shareholders suffered losses of almost 75% during that two-year stretch -- far worse even than the roughly 50% haircut the cryptocurrency itself experienced.
GBTC Discount or Premium to NAV data by YCharts.
... and back again?
In 2023, however, the opposite has happened. Improving Bitcoin prices have led more investors to purchase Grayscale trust shares, in turn narrowing the discount. As of Dec. 7, trust shares traded at just 12% below the value of the fund's underlying Bitcoin holdings. The total return for Grayscale shareholders so far in 2023 has been over 300% -- crushing even the 165% gains in Bitcoin itself year to date.
If Grayscale Bitcoin Trust succeeds in getting approval as a true ETF, moreover, there would likely be immediate gains for shareholders. An SEC-approved ETF would have provisions that would provide a mechanism for redemptions. The ability to use arbitrage would in turn make the remaining discount largely disappear.
With just a 12% discount remaining, the potential double-win for Bitcoin investors in Grayscale Bitcoin Trust isn't nearly as large as it once was. Yet those who are bullish on the cryptocurrency market generally might enjoy the possibility of getting a modest sweetener on top of their Bitcoin returns.
