More misery for grayscale investors as the biggest Bitcoin fund has hit new lows

There appears to be no bottom for Grayscale Bitcoin Trust (GBTC), as shares of the industry’s largest Bitcoin the fund reached a record discount of 35.18% last Friday.

GBTC shares allow investors to trade shares in trusts that hold pools of Bitcoin, with each share tracking the price of Bitcoin. The purpose is to give traditional investors exposure to the leading cryptocurrency without having to buy and hold the asset itself.

Since its inception in September 2013, GBTC has historically traded at a high premium to watch Bitcoin prices. For years this used to be quite an attractive option for investors even despite a hefty 2% annual management fee.

However, the trust turned negative and began trading at a discount to Bitcoin prices in late February last year, following the launch of several Bitcoin ETFs in Canada.

A discount to net asset value (NAV) can seem like a bargain as it allows investors to buy “shares” of Bitcoin below its actual market value. Still, it comes with a catch: There is no redemption mechanism for GBTC.

This means that the arbitrage trade of buying the discounted shares, redeeming them for the underlying asset (much like how an ETF would work), and then selling the underlying for a profit is closed. All GBTC holders are simply stuck with a rotting asset or forced to sell at a loss (depending on when they picked up their shares).

According to Grayscale’s website, GBTC currently has $11.9 billion in assets under management.

Bitcoin ETF: Mission Impossible?

Grayscale has long argued that the best way to solve the problem is to convert its GBTC product into a Bitcoin ETF – an exchange-traded fund backed by physical Bitcoin, as that would help bring the product back to the value of the underlying.

Standing in the way of the firm, however, is the US Securities and Exchange Commission (SEC), which has yet to greenlight any spot Bitcoin ETF for US investors – although it has approved several Bitcoin futures ETFs.

The SEC rejected Grayscale’s application to convert GBTC to a Bitcoin ETF in June, saying it did not do enough to protect investors from “fraudulent and manipulative acts and practices.”

The decision prompted Grayscale to sue the regulator, with CEO Michael Sonnenshein stating that the investment firm will continue to use all of its resources to advocate for its investors and “fair regulatory treatment of Bitcoin investment vehicles.”