How FTX’s Decision to Liquidate GBTC Holdings May Affect Its Discount

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This year, GBTC shares rose 220% to $26.79, indicating early adoption plans of investors. The main catalyst behind this is the discount on Grayscale’s Bitcoin Trust (GBTC) that significantly narrowed from last year’s 50% to around 15% as Bitcoin regains its bullish momentum and hope builds that the U.S. Securities and Exchange Commission (SEC) may approve its conversion into a spot ETF.

To address this crisis, the SEC might approve a Spot Bitcoin ETF before GBTC sales to alleviate discount concerns. But there are chances they may deny it. Here’s why? 

Meanwhile, the bankrupt crypto exchange FTX holds substantial GBTC holdings worth approximately $417 million and has hinted at returning funds to creditors in fiat currency rather than crypto. As per the court filing, they plan to trade their assets, including large holdings of SOL ($1.6B), bitcoin ($560M), and ether ($192M), cautiously to avoid market disruptions and price crashes. GBTC, the world’s largest crypto fund, manages over $21 billion in bitcoin assets.

While the recent narrowing of its discount is partly due to renewed bitcoin optimism and the potential for SEC approval, a lawsuit against its parent company, Digital Currency Group, could potentially impact its conversion to an ETF.

What Happens if SEC Rejects Grayscale’s Application? 

According to Scott Johnsson, a partner at Van Buren Capital, the bankruptcy reorganization plan for FTX may be confirmed in Q2 2024, and the market expects an SEC decision on spot bitcoin ETFs before that time. If GBTC has converted to an ETF by then, the sale of GBTC from the FTX estate should not significantly affect its discount, as the ETF creation and redemption process should closely track the underlying bitcoin price. 

However, if the SEC rejects Grayscale’s application for alternate reasons, it could negatively impact the discount. Sean Farrell, head of crypto strategy at Fundstrat, believes that SEC approval of a spot ETF would ensure creditors are made whole and lead to a more pronounced narrowing of the GBTC discount, potentially boosting crypto asset prices. 

Further Consequences…

On the flip side, seeing the discount drop from over 40% when BlackRock and others filed spot bitcoin ETF applications in June— is also a positive sign. It suggests that investors are more confident that GBTC will be converted into an ETF. This could lead to even more demand for GBTC shares, further driving the price. Hence, If the SEC doesn’t approve the ETF, the discount could widen, but the likelihood of this outcome is currently low.

Now that the SEC has chosen not to appeal the Grayscale ruling deadline, the court can instruct the regulator to re-evaluate Grayscale’s GBTC product’s conversion into a spot bitcoin ETF. However, the SEC may find alternative grounds for denial. Chair Gary Gensler declined to comment on the matter.