Grayscale Bitcoin Trust Trading at Massive Discount on ETF Bet

The world’s largest institutional Bitcoin fund from Grayscale is selling at a massive discount at the moment following the underlying asset’s retreat over the past two months.

One of the largest victims of Bitcoin’s almost 40% plunge from November’s all-time high has been Grayscale’s Bitcoin Trust (GBTC). The ‘Grayscale Premium’ is a closely watched industry metric as the fund fluctuates around the price of the asset itself.

According to Bloomberg Intelligence’s James Seyffart, the GBTC fund is currently trading at a discount of more than 26%. This means that with BTC currently priced at around $42,000, the discounted fund price would be equivalent to $30,870. The $27 billion has plummeted almost 17% so far in 2022, outpacing Bitcoin’s nearly 9% decline.

The industry analyst suggested that returns could be theoretically greater than the discount; 

“Many think this means a 26% return if the fund converts to an ETF but the return is actually much bigger. Eliminating a 26.5% discount would be analogous to a security appreciating to $100 from $73.50 – a 36% return.”

Betting on an ETF

Investors are betting that the discount would dissipate if Grayscale receives approval from the U.S. Securities and Exchange Commission (SEC) to convert the trust to a spot exchange-traded fund.

Seyffart added that there is no guarantee this discount will ever collapse or that it couldn’t get worse, and the current scenario excludes the risks and price movements of the asset itself,

“But $GBTC is essentially a leveraged bet on U.S. Spot Bitcoin ETF approval at this point — IMO.”

The trust does not allow the supply of shares to fluctuate in response to demand which is what causes the premium or discount. Brent Donnelly, president of Spectra Markets, commented that “GBTC keeps breaking hearts as the discount widens,” adding:

“GBTC is basically a binary bet on a physical ETF at this point. Tempting but tempting the way value traps can be tempting.”

Seyffart said that there are a number of influences on the widening discount such as the ease of buying BTC directly, the overinflation of assets by those playing the premium, and the prevalence of retail investors who are not familiar with the mechanism for the fund.

Bitcoin price outlook

The spot price of Bitcoin has fallen again during the morning of Jan 20 and is currently changing hands for $42,060 according to CoinGecko.

BTC has slumped almost 11% over the past month as markets continue to show bearish sentiment. BTC prices are still holding on above long-term support at $40,000, but a fall through this level could get very messy very quickly.