There is no free money in bitcoin

Grayscale Bitcoin Trust, under the ticker GBTC, is a publicly traded entity with nearly $11 billion in assets under management, all in bitcoin. It’s a way for anyone with a brokerage account to gain exposure to the cryptocurrency without the complexity of direct ownership. GBTC held about 635,000 bitcoin at the end of September, according to regulatory filings, or more than 3% of its circulating supply, according to CoinMarketCap figures.

In contrast to today’s 40%-plus share price discount to the dollar price of the trust’s bitcoin per share, it long commanded a premium, in part because of its simplicity for individual investors. Sophisticated traders loved it too, buying newly minted stocks and later selling them at a premium – a kind of arbitrage. That helped the fund grow so big, but the shares fell to a discount in early 2021. Unfortunately for current owners, the process doesn’t work the other way around.

GBTC’s sponsor is Grayscale Investments LLC, which is owned by Digital Currency Group. DCG has previously been authorized to buy shares in GBTC, which is a way of reducing the discount. As of late September, DCG and its companies owned close to 10% of GBTC shares, according to filings. Under securities rules that apply to Grayscale products like GBTC, affiliates cannot sell more than 1% of outstanding shares every three months, according to Craig Salm, chief legal officer at Grayscale. In this case, DCG will be an associated company.

Some GBTC shareholders may root for a dissolution of the trust and distribution of the underlying assets as a way to recoup the discount. But it is very difficult to see that as a potential or likely outcome. GBTC is a lucrative business with captive clients, which charge 2% of the fund’s assets a year as fees. At today’s level, that means more than $200 million annually. Also, even if it were possible, making so many bitcoins available for sale at once would raise the cryptocurrency’s price and potential profit potential.

But Grayscale has followed a different path to close the discount – converting GBTC into an exchange-traded fund. An ETF allows the creation and redemption of shares seamlessly, so any gap will be arbitrated away. The SEC has denied an ETF conversion application so far. Grayscale is suing the regulator in the US Court of Appeals for the District of Columbia Circuit.

Buying GBTC may be partly a gamble on how that process goes, and on Washington’s regulatory outlook in general. Perhaps recent events will intensify political opposition to legitimizing crypto by regulating it. But there could also be a shift to favor the view that regulating crypto is the best way to protect clients from things like the debacle at FTX, and that vehicles like ETFs are safer options.

Some of the recent increase in the discount may likely reflect investors’ general concerns about crypto-turbulence following the collapse of FTX. DCG also owns cryptocurrency lender Genesis, which suspended customer withdrawals in November and has been trying to raise cash, The Wall Street Journal has reported.

Regardless of what happens with Grayscale and its corporate siblings and parents, however, it’s important to note that the bitcoin trust is a separate legal entity. Grayscale said in mid-November that it is “prohibited from encumbering the digital assets underlying its products.” GBTC is a Securities and Exchange Commission reporting trust with an independent custodian account at Coinbase Global. Coinbase has vouched for these coins, which it said are segregated in “cold storage.”

So is it a bonanza to get? Investors bullish on bitcoin can still bet on long-term upside via GBTC. Boldest traders who have no interest in betting on bitcoin’s direction may see an opportunity to go short or bet on bitcoin declines while holding GBTC to make a clear bet on a narrowing of the fund’s discount. Still, that kind of two-step bet isn’t for the casual investor—it’s not cheap, either.

There is no easy money to be made in crypto.