Grayscale GBTC to ETF approval by US SEC would be a double-edged sword, Bloomberg analysts

The court approved Grayscale's appeal for its Bitcoin Trust to be converted into a spot BTC ETF on August 29.
Bloomberg Intelligence analysts have broken down what approval from the SEC would mean, citing potential impact for stakeholders.
Particularly, GBTC investors, Gemini Earn customers, Genesis, and FTX creditors would be impacted. Gary Gensler likely to feel the heat.

Grayscale won in its prolonged case against the US Securities and Exchange Commission (SEC). The asset manager's appeal to have its Bitcoin Trust (GBTC) converted to a spot Bitcoin Exchange-Traded Fund (ETF) finally bore fruit after the US District Circuit Court gave a positive ruling. According to Bloomberg analysts, the approval materializing into an actual conversion would provide a paradigm shift in the market, helping and hurting at the same time.

Also Read: Breaking: Grayscale wins lawsuit against US SEC, Bitcoin price nears $28,000

Grayscale GBTC to ETF conversion would cut both ways

According to experts from Bloomberg Intelligence, the SEC ultimately converting Grayscale GBTC to an ETF would have a bearing on several ongoing claims.

If the SEC relents and allows the GBTC conversion it will help all:

+ GBTC investors
+ Gemini Earn customers
+ Genesis creditors
+ FTX creditors (summary below)

It will hurt:

+ Chair Gensler's paper mache ego. pic.twitter.com/FJUsSqvdQZ
— Ryan Selkis (@twobitidiot) August 30, 2023

First, GBTC investors could finally redeem their fund shares, something the asset manager was struggling with, and reduce fees. These concerns had been raised by FTX's sister firm, Alameda Research. An approval would, therefore, quell the claims levied by the crypto hedge fund.

When Genesis filed for bankruptcy earlier in the year, customers of its yield-bearing product, including Gemini, were revealed to be the largest creditors. It pointed to Gemini selling its GBTC shares, which Genesis had used as collateral. With Grayscale's struggles, there was not enough money to go around, meaning creditor settlement has been an issue.

Conversion of the GBTC to ETF would unlock settlement potential, perhaps achieving a settlement for Gemini earn customers, Genesis, and FTX creditors. More broadly, approval would help every stakeholder suffering exposure to Grayscale.

Hang in there! It's frustrating when egos get in the way of progress, but hopefully the SEC will come around and help all those who can benefit from the GBTC conversion. Keep the faith!
— Monke (@GorillaMonkey13) August 30, 2023

Potential impact of GBTC to ETF conversion in Grayscale's value

The market responding to the recent victory for GBTC is driving increased demand for the Grayscale Bitcoin Trust shares. Citing Bloomberg Intelligence expert James Seyffart:

Once converted to an ETF, GBTC would no longer trade at meaningful discounts or premiums due to the ETF structure's efficiencies.

As a side note, Grayscale's GBTC discount has been narrowing, meaning investor confidence in the trust has increased. This is also interpreted as increased demand for the shares and could see investors rake in more profit, especially if the discount narrows further or completely disappears.

A Bitcoin Trust is a close-ended fund (CEF). This is different from ETFs, where authorized participants can maintain close value for their assets. Traders can create new shares of an ETF, making money when its market capitalization goes above its stock value. When market capitalization drops relative to the value of stocks, traders can redeem shares.

The GBTC has been trading at a discount to Grayscale's BTC holdings for two years. It got worse during the FTX implosion, with Genesis's woes harming Grayscale, possibly because most firms had betted on Grayscale's narrowing discount while they remained customers of Genesis. When Genesis went under, these firms lost money, thereby affecting their trading strategies. Consequently, GBTC discounts moved from 43% to 50% between November and December.

Cryptocurrency metrics FAQs

What is circulating supply?

The developer or creator of each cryptocurrency decides on the total number of tokens that can be minted or issued. Only a certain number of these assets can be minted by mining, staking or other mechanisms. This is defined by the algorithm of the underlying blockchain technology. Since its inception, a total of 19,445,656 BTCs have been mined, which is the circulating supply of Bitcoin. On the other hand, circulating supply can also be decreased via actions such as burning tokens, or mistakenly sending assets to addresses of other incompatible blockchains.

What is market capitalization?

Market capitalization is the result of multiplying the circulating supply of a certain asset by the asset’s current market value. For Bitcoin, the market capitalization at the beginning of August 2023 is above $570 billion, which is the result of the more than 19 million BTC in circulation multiplied by the Bitcoin price around $29,600.

What is trading volume?

Trading volume refers to the total number of tokens for a specific asset that has been transacted or exchanged between buyers and sellers within set trading hours, for example, 24 hours. It is used to gauge market sentiment, this metric combines all volumes on centralized exchanges and decentralized exchanges. Increasing trading volume often denotes the demand for a certain asset as more people are buying and selling the cryptocurrency.

What is funding rate?

Funding rates are a concept designed to encourage traders to take positions and ensure perpetual contract prices match spot markets. It defines a mechanism by exchanges to ensure that future prices and index prices periodic payments regularly converge. When the funding rate is positive, the price of the perpetual contract is higher than the mark price. This means traders who are bullish and have opened long positions pay traders who are in short positions. On the other hand, a negative funding rate means perpetual prices are below the mark price, and hence traders with short positions pay traders who have opened long positions.

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