Potentially Serious Bear Case For Grayscale GBTC ETF Conversion

The conversion of the Grayscale Bitcoin Trust (GBTC) into a spot ETF may result in billions of dollars of outflows.

The fund could be eyeing a $3 billion withdrawal in the case of "success"

There is huge anticipation of the effect that the SEC's approval of one or more spot bitcoin ETFs will have on the markets. However, analysts have cautioned that the outcome for Grayscale may not be what they're hoping for.

Following a significant legal victory over the SEC, Grayscale is seeking to convert its Grayscale Bitcoin Trust (GBTC) trust into a spot BTC ETF. Should that occur, it could result in substantial outflows from the product, not inflows, as might be expected.

Arbitrage Play

JPMorgan analysts have suggested that at least $2.7 billion might exit from GBTC, should it be converted to an ETF.

The reason is that traders have not only been investing in GBTC to gain exposure to bitcoin. Due to the structure of the product and the delays involved in redemptions, GBTC has been trading well below the price of bitcoin—at points, as much as 40-50% below. Traders have been buying GBTC (which is essentially discounted BTC) as an arbitrage play, betting that the ETF conversion will be approved. At that point, they will immediately be able to sell at the current market price and pocket the difference. As more traders take this bet, the discount to spot BTC reduces.

JPMorgan's analysts believe that $2.7 billion is the minimum that might be withdrawn from GBTC, and that a higher figure should be expected if the management fee of 200 bps is not reduced. For context, a recent update from Ark gave a fee of 80 bps for their ETF, meaning that Grayscale would need to reduce theirs considerably to remain competitive.

Grayscale: The Largest Bitcoin Holder

While this would not be good news for Grayscale, the analysts believe that much of the money would be allocated to different bitcoin products, including other ETFs with better fee structures, so the flood of redemptions may not impact the market negatively.

At the time of writing, GBTC remains the largest known holder of bitcoin after Satoshi, with 643,572 BTC under their control, or just over 3% of total supply. At the current price of $38,000, this is worth a total of $24.5 billion.


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