Grayscale Wants to Turn its BTC Fund into an ETF
2 min read
Grayscale, the US investment firm responsible for a $38.8 billion closed-end fund, has its sights trained on turning the fund into a BTC Exchange-Traded Fund as soon as possible.
“We are 100% committed to converting GBTC into an ETF,” said the firm in an announcement today, adding “The timing will be driven by the regulatory environment.”
How does Grayscale’s BTC Fund Work?
The Grayscale BTC Fund, launched in 2013, is a closed-end fund. Large institutional investors wire Grayscale some money (or some BTC), then Grayscale invests that money into BTC and sells shares in the fund on the stock market. It’s one of the only ways that US investors can gain exposure to BTC through the stock market.
But the business model comes with a few disadvantages: First, Grayscale charges a hefty management fee of 2%. Second, institutions that bankroll the fund have to lock up their BTC for a minimum of six months, meaning that investments are highly illiquid.
This is of concern because, third, shares in the fund stray away from the price of the BTC they represent; usually, the shares in a fund trade at a premium to the price of BTC, although in the past month straight they’ve traded at a discount.
If shares trade at a premium, shareholders are paying too much for their BTC. If shares trade at a discount, institutional investors who borrowed a lot of BTC to fund the trust will lose money should they sell shares at discount to the price of BTC.
Enter ETFs
ETFs, on the other hand, are far cheaper to run and it’s easier to withdraw money from them. The main issue has been that the US Securities and Exchange Commission has rejected all applications for BTC ETFs, claiming that the price of BTC is vulnerable to manipulation. In 2016, Grayscale submitted its own application, but withdrew it the following year in anticipation of rejection.
“Ultimately, we withdrew our application because we believed the regulatory environment for digital assets had not advanced to the point where such a product could successfully be brought to market,” it said today.
However, a new administration, SEC chairman and successful BTC ETFs in neighboring Canada have renewed excitement for a BTC ETF in the US. Should the SEC approve those applications, the Grayscale BTC Trust would seem expensive and cumbersome by comparison.
Grayscale said in its announcement today that its intention “has always been to convert these products into an ETF when permissible.” Should the conversion take place, Grayscale will lower the management fee.
