Grayscale’s Spot Bitcoin ETF- How Could it Play Out?
5 Sep 2023 by Rory Kejzerko 3 min read
Grayscale’s Spot Bitcoin ETF- How Could it Play Out?

Last week saw Grayscale win its lawsuit against the US Securities and Exchange Commission (SEC). 

Here, the digital currency asset manager- owned by parent company Digital Currency Group (DCG) - successfully sued the regulator after it rejected an application regarding the conversion of the Grayscale Bitcoin Trust (GBTC) into a Bitcoin Spot ETF

Although a win for crypto, the victory doesn’t necessarily mean that the GBTC will be automatically converted into a Bitcoin Spot ETF, as instead, all it means is that Grayscale can refile the same application. 

Whilst you may assume that the company would be zealous to get its reapplication back underway, the dynamics surrounding its parent company, other subsidiaries, and the impacts of a Grayscale Bitcoin Spot ETF make things a lot messier that the surface suggests...which is what this article intends to uncover.

The Grayscale Bitcoin Trust (GBTC) 

The GBTC launched back in 2013, and is currently backed by over $16 billion worth of physical BTC

Similar to an ETF, ‘trusts’ such as the GBTC represent a share in an underlying asset, however in contrast, they don’t frequently issue or redeem shares. This is predominantly due to the fact that trusts can’t issue shares based on real-time market forces (hence Grayscale’s application to convert it into an ETF). 

Consequently, such dynamics can lead to deviating price differences between shares and underlying assets- which, in the case of the GBTC and BTC, is known as the ‘GBTC premium’. 

An Approved Grayscale Bitcoin Spot ETF- Possible Market Effects

Inadvertently, if the SEC was to approve of Grayscale’s conversion application, a paradoxical crypto crash may be on the horizon.

This is because GBTC investors who purchased at a discount are, in theory, sitting on huge unrealised profits that could become realised once the spot ETF conversion takes shape.  

Given the relatively simple economic principles in which spot ETFs follow, if GBTC investors decide to take profits, these mass selling actions would cause downward pressure on the price of BTC…

Which we could then assume would lead to the altcoin market following suit. 

The Grayscale Spot Bitcoin ETF- Other Factors to Consider 

Unfortunately- or perhaps fortunately- it’s unlikely that Grayscale’s Bitcoin Spot ETF will be approved and launched before those of other asset managers (who, like world-dominating BlackRock, are further along in the application process).

Further, this could have differing impacts on the GBTC and BTC landscapes depending on timespan. 

In the short-term, GBTC onlookers may be bullish to invest more, as with other Bitcoin Spot ETFs in place, they’d now have evidence that a Grayscale Bitcoin Spot ETF is possible (or perhaps imminent). 

However, once deployed (in the medium-term), we’d then see the previously-mentioned scenario occur, wherein GBTC investors will be able to realise massive profits through their GBTC premiums, adding downward pressure on the price of BTC and altcoins.

In turn, a Grayscale Bitcoin Spot ETF may also have repercussions on Grayscale’s parent company DCG, as another of its subsidiaries ‘Genesis’ owes billions to investors. 

For the time being, GBTC’s 2% fees on ‘assets under management’ makes it DCG’s biggest moneymaker. These funds- said to be in the tens of millions of dollars each month- are currently being used to pay back Genesis’s creditors.

However once the GBTC is converted into a Bitcoin Spot ETF, this much-needed revenue stream will be lost… therefore possibly discouraging or delaying Grayscale from making the almighty transition.

In conclusion then, logic (as well as industry rumours) suggests that Grayscale is in no hurry to join the Bitcoin Spot ETF game, however this is something that we’ll only come to realise if and when the reapplication is made. 

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This article is intended for educational purposes and is not financial advice.