Why approving a Bitcoin ETF might unleash $18 billion in sell-pressure

The introduction of a spot-based Bitcoin (BTC) exchange-traded fund (ETF) would make the digital currency more accessible to individual investors and mutual funds. Furthermore, in contrast to a futures-based Bitcoin ETF, a spot-based ETF necessitates the actual acquisition of BTC.

Will the approval of the first Bitcoin ETF be a bullish event? Not necessarily.

GBTC ‘discount’ remains in the double digits 

For the past several years, the United States Securities and Exchange Commission (SEC) has refused to approve any Bitcoin Exchange Traded Fund (ETF) proposals, including the most recent application from VanEck Bitcoin Trust, which was denied on March 10, 2023.

The SEC determined that the proposal lacked a “thorough surveillance-sharing pact with a regulated marketplace of noteworthy size concerning spot Bitcoin”. Regulators are reluctant to provide what many believe would be a fairer and more translucent Bitcoin product.

Investors are now wondering if ARK Investment and BlackRock’s recent proposals to introduce their spot Bitcoin ETFs could be the answer to Grayscale’s Bitcoin Trust (GBTC), a stock exchange-traded investment vehicle.

The GBTC “premium” rose to its highest levels in months after BlackRock declared its ETF filing, interestingly.

Though the possibility of a Bitcoin ETF being approved could appear to be a positive sign, its effects on the value of BTC could be negative in the short run.

What’s an ETF?

At first, an exchange-traded fund (ETF) is a type of security that contains a variety of underlying investments, such as commodities, stocks, and bonds. This ETF may be similar to a mutual fund since its issuer pools and oversees the assets.

The most renowned instance of this instrument is SPY, the exchange-traded fund that follows the S&P 500 index. State Street is responsible for managing the mutual fund’s assets valued at $436 billion.

The competition to launch a Bitcoin ETF is intensifying as ARK Invest has included a surveillance agreement in its application.

Purchasing an ETF gives the investor direct ownership of the fund’s contents, which leads to different tax implications than holding futures contracts or leveraged positions. Although Bitcoin spot ETFs have yet to be authorized, products of a similar nature have been available for a long time for bonds, global currencies, gold, Chinese equities, real estate, and oil.

30% GBTC discount is likely justified

The Grayscale Bitcoin Trust (GBTC), which has $18.4 billion of assets under management, is currently trading at a discount of -30% when compared to the market value of its Bitcoin holdings. This disparity between its 626,778 Bitcoins and the GBTC shares being traded on regular stock exchanges dropped to as much as -49% in December of 2022.

Consequently, it is reasonable to offer this discount as the instrument lacks the capabilities to facilitate arbitrage. Grayscale’s GBTC is the dominant player in the crypto market, despite being categorized as a closed-end fund, meaning the amount of shares available is restricted.

Shares of GBTC are not produced without restriction, nor do they have any type of redemption plan. Because of this lack of efficiency, there are substantial price discrepancies when compared to the fund’s actual Bitcoin holdings. In comparison, an ETF grants the market maker the capacity to both issue and redeem shares, which generally keeps the premium or discount to a minimum.

GBTC imposes a fixed 2% yearly administrative fee, so the discount may be considered reasonable given that the SEC continues to deny appeals and requests from all fund managers.

In contrast, ETFs usually have a share price that is equivalent to their net asset value, unlike GBTC. As an example, on June 27, the Purpose Bitcoin ETF (BTCC.U) had a net asset value of $5.63 per share, and the shares closed at $5.65 on the Toronto Stock Exchange.

The U.S. derivatives ProShares Bitcoin Strategy ETF (BITO) had an underlying price of $16.89 on June 28th, which was the same as the price of its shares on the same day.

Spot Bitcoin ETF approval might initially pressure BTC

Essentially, an investment trust product is not as attractive as an ETF, and Grayscale has not done much to lessen the effect on GBTC investors as of yet. Nevertheless, market opinion improved slightly after the world’s biggest asset manager, BlackRock, registered to introduce a Bitcoin spot price ETF.

The difference between the share price and its value will eventually become negligible as redemptions and arbitrage opportunities become available if the SEC allows Grayscale, the asset manager, to transform its GBTC Trust into a legitimate Bitcoin ETF.

In this situation, it is likely that a significant amount of BTC could enter the market as investors will finally have the opportunity to sell their holdings at a fair price.

The only inquiry is: to what extent of the $18 billion will be invested into other Bitcoin-related entities or be put up for sale on exchanges?

It is likely that the approval of a Bitcoin ETF will lead to a substantial sell-off from Grayscale’s GBTC conversion, as Bitcoin that has been held for 3-8 years is returned to the market.

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