US investors have been waiting for approval of a Bitcoin exchange-traded fund (ETF) since May 2014, when the Winklevoss Bitcoin Trust filed an amendment application with the Securities and Exchange Commission (SEC).
Over the years, the SEC has rejected all applicants, with the latest denial being issued to WisdomTree’s application for a Bitcoin Spot ETF on Oct. 11. The SEC concluded that the offering did not have the ability to “obtain information necessary to detect, investigate, and deter fraud and market manipulation, as well as violations of exchange regulations and applicable federal securities laws and regulations.”
Bitcoin fiat investment vehicles have been around since 2013, but have been restricted to accredited investors. The launch of a spot BTC ETF would open up the market to retail investors and a broader range of investment funds in the sector.
At the moment, US regulators are reluctant to launch what many believe would be a fairer and more transparent product for Bitcoin. A contradictory reality is that while spot BTC ETFs continue to be shunned, the same product has long been available for bonds, global currencies, gold, Chinese stocks, real estate, oil, and silver.
The Grayscale Bitcoin Trust Fund (GBTC), a $12.3 billion investment fund, is currently trading at a record 36.7% discount to its Bitcoin holdings, but it may not be a “buy the price” discount. dip”. The gap started after the Toronto Stock Exchange launched the Purpose Bitcoin ETF in February 2021, which is a spot investment product.
What is an exchange-traded fund?
An ETF is a type of security that holds diversified underlying investments, including commodities, stocks, or bonds. The ETF can resemble a mutual fund because it is pooled and managed by its issuer.
SPY, the ETF that tracks the S&P 500 index, is the most recognizable example of this instrument. This investment fund is currently managed by State Street and has USD 328 billion in assets under management.
There are also more exotic structures, such as the ProShares UltraShort Bloomberg Crude Oil (SCO). This fund uses derivatives and claims to offer two times daily short leverage on oil prices, meaning that investors are effectively betting on a decline in oil prices.
The purchase of an ETF gives the investor direct ownership of its content, which generates a different taxation than the holding of futures contracts and leveraged positions.
Trust funds, such as the GBTC, do not offer redemption or conversion rights
Investment trust funds fall outside the authority of the SEC and are, in fact, regulated by the United States Office of the Comptroller of the Currency.
Grayscale’s GBTC is the absolute leader in the cryptocurrency market, even though it has been structured as a company, at least in its statutory form. The mutual fund is considered a closed-end fund, which means that the number of shares available is limited.
Accordingly, GBTC shares are not freely created, nor do they offer a redemption program. This inefficiency creates significant price discrepancies against the fund’s underlying Bitcoin holdings. Instead, an ETF allows the market maker to create and redeem shares, ensuring that the premium or discount is minimal in most cases.
For example, the Purpose Bitcoin ETF (BTCC.U) had a net asset value of $3.59 per share on Oct. 13, and the shares closed at $3.60 on the Toronto Stock Exchange. Similarly, US derivatives ProShares Bitcoin Strategy ETF (BITO) had an underlying price of $11.94 on Oct. 13, while its shares traded at $11.95.
Grayscale is fighting the SEC, but results could be years away
In June 2022, asset manager Grayscale filed a lawsuit with the SEC regarding the conversion of GBTC into a Bitcoin spot ETF. The firm has been awaiting a final decision from the regulator since submitting its application in October 2021.
Grayscale’s chief legal strategist stated that the SEC’s rejection was “arbitrary” by “failing to apply consistent treatment to similar investment vehicles.” As a result, the asset manager filed a legal remedy based on the alleged violation of the Administrative Procedure Act and the Securities Exchange Act by the SEC.
Keep in mind that eight and a half years have passed since the first Bitcoin Spot ETF registration application was filed. At the moment, GBTC charges a fixed management fee of 2% per annum, so the 36.7% discount could be justified as the SEC continues to reject appeals and requests from all fund managers.
In essence, the investment trust product is far less optimal than an ETF, and so far Grayscale has done little to minimize the impact on GBTC holders.
The views and opinions expressed here are solely those of the author and do not necessarily reflect the views of Cointelegraph.com. Every investment and trading move involves risk, you should do your own research when making a decision.
Investments in crypto assets are not regulated. They may not be suitable for retail investors and the full amount invested may be lost. The services or products offered are not aimed at or accessible to investors in Spain.