What are the reasons and impacts of GBTC negative premium narrowing?

Source: Coindesk; Compilation: BitpushNews Mary Liu

Grayscale Bitcoin Trust (GBTC), with a market capitalization of nearly $14 billion, is a focal point in the crypto investment space, with the fund trading at increasingly larger prices relative to the value of its bitcoin holdings for more than two years, but a major turnaround in recent weeks has boosted investor confidence.

Martin Leinweber, digital asset product strategist at MarketVector Index, told CoinDesk in an interview: “When the negative premium narrows, it indicates that investors are becoming more confident in the trust, or that demand for the stock is increasing. If the discount narrows sharply or disappears completely, investors’ returns can be substantial.”

**So, why is there a negative premium, why is it important, and why is the negative premium shrinking? **

In answering these questions, it is important to understand the structure of a trust. GBTC is a closed-end fund (CEF), unlike the exchange-traded funds (ETFs) that have exploded in popularity in recent years. Both are effectively vaults that hold vast amounts of assets, whether it’s stocks or the billions of dollars worth of bitcoin held by the Grayscale trust.

But **ETFs have a feature that ensures that professional trading firms known as authorized participants help keep their value closely aligned with the value of the assets they hold. **If an ETF has $10 billion worth of shares but has a market cap of $12 billion, these traders can create new shares of that ETF. Doing so allows them to make money on the premium, while also pushing the price of the ETF down to the value of the ETF's holdings; intermediary fund houses are rewarded for making the ETF more efficient.

Conversely, if the ETF's price falls to a negative premium—say, its market cap falls to $8 billion against $10 billion in assets—these traders can redeem the shares, profiting again on the difference, and pushing the price and assets back to parity.

**Grayscale wanted to convert GBTC into an ETF, but the SEC rejected the proposal. Grayscale has filed a lawsuit to overturn the decision. At the same time, as a closed-end CEF, it lacks the arbitrage mechanisms that ETFs use to keep prices from getting out of hand. **

Since February 2021, GBTC has been trading below the bitcoin it holds. After the FTX explosion last year, the situation deteriorated dramatically. In November, Genesis’ lending arm stopped customer withdrawals, and the negative GBTC premium increased to 43%. Why Genesis' woes hurt GBTC is unclear, although the theory is that many trading firms are clients of Genesis, some of which may bet on shrinking negative premiums, and losing funds could hinder these trading strategies.

** The negative GBTC premium deepened to a record 50% in December after the SEC reiterated its reasons for rejecting Grayscale's application to convert the trust into an ETF. **

**Why has the negative premium narrowed sharply in recent weeks to its smallest value since early 2022? **

The hottest topic in the crypto space right now is whether U.S. regulators will finally approve spot bitcoin ETFs, which currently only allow ETFs that hold bitcoin futures contracts. BlackRock, the traditional financial giant, recently invested heavily in the move, fueling great optimism that a spot bitcoin ETF might not be far off, given its presence in Washington, D.C. as the world's largest asset manager. Others, including large mutual fund manager Fidelity, have also applied for bitcoin ETFs.

Analysts said the possibility of the ** US SEC approving the conversion of GBTC into an ETF was one reason for the narrowing of the discount. **Grayscale said in April that it expects to know by the end of the third quarter whether conversion of GBTC into an ETF is permitted.

Leinbewer said: "The catalyst for the narrowing of the current GBTC discount may be the ongoing legal discussions surrounding the possibility of GBTC converting to an ETF. The market appears to be reacting to these discussions, and expectations of a potential legal victory for GBTC may drive increased demand for the stock. Think of the discount [to NAV] as an implied probability of converting to an ETF. The lower the discount, the higher the probability that the market price will rise."

Referring to Grayscale's lawsuit against the SEC, Bloomberg Intelligence ETF analyst James Seyffart said he expects the decision to be positive for Grayscale. “But this will only send GBTC’s ETF conversion request back to the SEC to approve GBTC’s conversion or deny it for different reasons. The hope of such a conversion may be what caused the negative premium to narrow.”

Seyffart added: “We don’t know how long it will take for the SEC to approve these products. That could happen with this wave of applications (we think Grayscale has a 50/50 chance of being approved right now, but it could take years if it gets rejected again). We also don’t know how long it will take for Grayscale to convert GBTC once approved.”

**What happens if GBTC is converted to an ETF? **

Seyffart said that the recent rush of large U.S. institutions to apply for bitcoin spot ETF approval has given rise to great hope for Grayscale's potential to convert GBTC into an ETF.

It is only a matter of time before GBTC is converted to an ETF, he said. Seyffart said: “Once converted to an ETF, GBTC will no longer trade at a significant discount or premium due to the flexibility of the ETF structure.”