GBTC: The only place to buy Bitcoin for 58 cents on the dollar

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Bitcoin is breaking out above its critical $25,000 level, which has served as stubborn upside resistance for the past nine months. Trading above $27,000 on Friday morning, Bitcoin looks like it is trying to mount a new bull trend.

Like gold, Bitcoin is a proxy for fractional reserve banking and fiat currency skepticism. With two major US banks failing this week as the government steps in to bail them out, it’s no surprise that Bitcoin is on the rise.

And Grayscale Bitcoin Trust (OTCMKTS:GBTC) is the most effective way to play Bitcoin rally. The trust trades at a whopping 42% discount to Bitcoin in the fund, meaning you’re buying Bitcoin for 58 cents on the dollar, and you can do it through your brokerage account.

There are also some exciting catalysts for the fund, as Grayscale, the fund’s manager, is in a legal battle with the SEC to convert the trust into an ETF.

What is Grayscale Bitcoin Trust?

The Grayscale Bitcoin Trust (OTCMKTS: GBTC) is an exchange-traded fund that holds Bitcoin. The whole idea of ​​the fund is to give investors a way to invest in Bitcoin without the compliance and custody considerations that come with buying and storing the actual crypto tokens.

GBTC works as a closed-end fund, similar to an ETF. Still, for some technical reasons, which we’ll get into later, it can trade at significant premiums or discounts to its net asset value (NAV), unlike an ETF. Throughout the fund’s history, it has traded at a significant premium to NAV due to its convenience and compliance.

Why is there a discount?

As a closed-end, GBTC lacks the built-in arbitrage mechanism that allows market makers to create and destroy shares at will to bring the fund’s price in line with its net asset value. Between 2017 and 2021, this fact, combined with GBTC being the only way for institutional investors to access Bitcoin, caused the fund to trade at a sustained premium.

Historically, GBTC has an average premium of around 20%.

Hedge funds capitalized on this premium by executing a simple arbitrage trade. They bought GBTC directly from Grayscale in a private placement, so they could buy at NAV. However, there was a catch: they had to wait 6 months before selling the shares. As long as the premium persisted, the trade yielded substantial profits.

But investors won’t pay a premium forever. Eventually, GBTC’s premium to Bitcoin holdings began to decline, creating losses for hedge funds, which in many cases borrowed heavily to make the arbitrage trade.

The resulting margin calls led to a widespread liquidation of GBTC for over a year. However, the current deep discount provides a significant margin of safety, and two catalysts in play could close the discount.

Three catalysts to close the discount

The SEC lawsuit: fight over a Bitcoin ETF

Shades of Gray have been trying to turn GBTC into an ETF for a long time, but the SEC continually rejects them. The fund manager is now suing the regulator after it rejected its application to convert GBTC into a Bitcoin ETF.

Grayscale CEO Michael Sonnenshein said the company was “really encouraged” after giving the DC Circuit Court of Appeals oral arguments.

Converting GBTC to a spot Bitcoin ETF will mean that the fund will almost immediately start trading at its net asset value.

Shareholders sue Grayscale

A number of shareholders have sued Grayscale to force the company to take action to close the fund’s deep discount to net asset value (NAV). Fir Tree Partners, a hedge fund, is in a legal battle with Grayscale.

The hedge fund claims that Grayscale prohibits redemption of the fund for its gains and recommends that Grayscale initiate a tender offer to buy shares at net asset value.

Suppose activist investors like Fir Tree can put enough pressure on shades of grey. If so, they may have to start trading to redeem some shareholder value.

A Bitcoin Bull Market

Bitcoin has been on an aggressive rally to start the year. This month it received an additional tailwind with the tangle of bank failures and government intervention in the financial system. Despite the bullish price action, the classic conditions for a Bitcoin hype train are not yet in place, meaning the discount on Grayscale is not yet closed.

If Bitcoin continues to rally and the hype train returns, the GBTC discount is likely to diminish.

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