Falling GBTC Premium Indicates Market Expects SEC to Approve Bitcoin ETFs

Next month, the U.S. Securities and Exchange Commission (SEC) has to make a couple of decisions regarding bitcoin ETFs. While three of them are pending approval, the third, Barry Silbert’s Bitcoin Investment Trust (BIT), is many months away. As the deadlines for the first two bitcoin ETFs draw near, the BIT’s premium has fallen significantly, indicating that the market may be expecting the Commission to approve a bitcoin ETF soon.

Also read: Needham’s Insights Into Factors Affecting SEC’s Decision on Bitcoin ETFs 

GBTC Trading at Premium

BIT is an open-ended trust sponsored by Grayscale Investments available to accredited investors. Trading under the symbol GBTC on the OTCQX market, it is invested exclusively in bitcoin. Its annual fee is 2 percent, and at the end of January, it has $165.64 million assets under management. BIT shares also have a one-year hold period before they are “eligible to become unrestricted and resold in the public market”, wrote Grayscale, citing the SEC Rule 144.

GBTC typically trades at a substantial premium to its Net Asset Value (NAV). Its NAV per share tracks the price of bitcoin and is calculated daily. Its market price per share is the closing price of BIT shares on the OTCQX market.

According to Needham & Company which provides investment analysis of GBTC, there are several reasons why GBTC trades at large premium. “Some investors prefer or require that their investments are registered securities – which means that holding bitcoin directly is a nonstarter for at least some subset of investors”, Needham explains in its latest ETF report. Other reasons include avoiding the risk of handling bitcoin themselves and the complexity and hassle of dealing with bitcoin exchanges, Needham further details, adding that there are also investors who just don’t realize they are overpaying for the associated amount of bitcoin.

The number of bitcoin per GBTC share is 0.09350819. As of February 17, GBTC’s market price per share is $108 and its NAV price per share is $97.96.

Premium Disappearing

Recently, GBTC premium over its NAV has fallen significantly, which indicates that the market may be expecting the SEC to approve a bitcoin ETF soon. Needham wrote:

If a bitcoin ETF were approved and listed, the premium on GBTC would likely disappear in very short order. As such, speculators would likely put downward pressure on the GBTC premium if they think approval of an ETF is likely [..] Indeed, this seems to be the case recently as the premium on GBTC has fallen to its lowest level in more than a year.

Contrary to what the market may be signaling, Needham estimates that the chance of the SEC approving a bitcoin ETF is less than 25 percent.

While citing that speculations of an ETF approval may be a major factor driving GBTC premium down, the firm also mentioned other factors. For example, some investors who bought the shares a year ago may be selling them and “take whatever premium still remains to avoid the risk that the premium disappears entirely in the case of ETF approval”, Needham wrote.

Do you think the market is too optimistic about the SEC’s decision on bitcoin ETFs? Let us know in the comments section below.

Images courtesy of Shutterstock, Needham & Company, and Grayscale

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