In the comment letter, sent in response to the NYSE’s application to list the Grayscale Bitcoin ETF, the attorneys argued that the SEC has no basis for holding the position “that investing in the derivatives market for an asset is acceptable for investors while investing in the asset itself is not.” That position violates the Securities Exchange Act of 1934, as amended, as well as the Administrative Procedure Act (APA), according to the letter.
Bitcoin Futures vs. Grayscale Bitcoin Trust
The availability of Bitcoin futures ETFs eats into Grayscale’s market. Their fees are sharply lower than GBTC’s 2%, ranging from 0.65% to 0.95%, as are their discounts to NAV — currently 1% or less versus 17% for GBTC.
But Bitcoin futures have their own complications, including the additional cost of rolling from one futures contract before expiration date into a more current contract, which in the current market structure involves selling a cheaper contract to buy a more expensive one. Estimates for the roll costs range between 10%-15% a year, said Morningstar’s Blue.
Still, said Blue, “having a trust like GBTC with its inherent disadvantages is too much for investors to overcome. It becomes easier and easier to access different crypto vehicles. As more options come, GBTC will look less and less palatable.”
How to Solve GBTC’s Deep Discount Problem
While Grayscale awaits an SEC decision on its Bitcoin ETF proposal, which woulderase some of those disadvantages, it has the power to address one shortcoming now. It can institute a redemption program, whereby investors could redeem shares with GBTC at NAV, which would eliminate the shares’ discount to NAV,Blue wrote.
Grayscale tried such a program previously, but it was halted by the SEC in 2016 on the grounds that it violated Regulation M, which bans share repurchases at the same time that a firm is offering shares through private placements. Such a program now would not violate that regulation because Grayscale is not currently offering new shares, Blue wrote.
But it would reduce Grayscale’s assets under management and thus the collection of fees charged on those assets.
