Summary Grayscale Investments wins court case against SEC, forcing the regulator to vacate its rejection of Grayscale's attempt to convert its Bitcoin Trust into an ETF. The discount on Grayscale's Bitcoin Trust has narrowed to around 10%, making it less attractive for obtaining Bitcoin exposure compared to other options. Grayscale aims to convert the fund into an ETF, which is expected to eliminate the discount and result in an 11% upside, offset by an annual management fee of 2%. Grayscale Investments won a landmark court case ( see here ) with the result being the SEC must vacate its rejection of Grayscale's attempt to convert Grayscale Bitcoin Trust ( GBTC ) into an ETF or exchange-traded fund. The process of ETF's being submitted to the SEC is one that's widely publicized. I've been anticipating this would ultimately happen since the end of 22' and this closed-end fund offered Bitcoin exposure at a 40% discount. Currently, the discount has narrowed to ~10%. Data by YCharts Even though I primarily bought the Grayscale fund, end of 22", to capture the monster discount, I've also used it as a preferred way to obtain Bitcoin exposure. We're getting to a discount level where I've decided to get Bitcoin beta somewhere else (I wrote up one example here ) and use the Grayscale position only to capture the juicy arbitrage. I am bullish on Bitcoin and think the by-now much-publicized ETF tailwind and halving event are real tailwinds. A 10% discount isn't terrible, but I think there are better ways to get Bitcoin exposure because 1) there are other options where Bitcoin is still more heavily discounted and 2) the GBTC fund is fully margined, which is very inefficient if you can otherwise put that space to good use. I don't necessarily use a lot of net leverage but I do tend to use quite a bit of gross leverage. For example, when I go long a fixed-income closed-end fund and short a fixed-income ETF against that to capture a discount. Grayscale wants to convert this fund as soon as possible to get to market as one of the first spot ETFs. There is something of a race going on with various firms like Fidelity, BlackRock and Grayscale (among others) all trying to launch ETFs. When the fund converts, the discount should disappear and this will result in roughly 11% worth of upside. This is partly offset by the annualized management fee of around 2%. The SEC's hand is forced by the court verdict and the regulator seems, judging by the newsflow around meetings, to be working constructively to get an ETF over the line. It is expected this will happen in the first half of January of 2024. Given 1) the assets in the fund can be almost perfectly hedged and 2) the upcoming catalyst seems near-inevitable as well as imminent at this point, at a 10% discount this still seems like a steal. I expected the discount to have narrowed to 3-5% by now. I do think it is now very favorable to hedge out the underlying Bitcoin exposure. It allows me to pick up ~11% while effectively committing no net capital. I can go long GBTC and short between 100%-110% of the long position through BITO. This nets out to zero or close to it in Bitcoin market exposure. It depends on the exact hedging ratio you choose. By mid-January the position should have returned 10% vs the long position. In closed-end fund arbitrage, it is usually very hard to hedge the underlying in a very clean way. Sometimes the underlying consists of hundreds of positions, sometimes you don't know every holding, and usually, the portfolio you're working with is based on stale data. In this case, it is remarkably easy which makes this a surprisingly good opportunity. Meanwhile, if you hold on here unhedged, the underlying volatility may dwarf the 10% return we're targeting with the arbitrage. Perhaps the underlying moves 24% up or 22% down. It wouldn't really surprise me. With little time left on the clock, there is not a lot of time for mean reversion if there's an unusually big move. The 10% is an enormous tailwind even for Bitcoin, but at the end of the day, I prefer the hedged return from this vehicle. The Bitcoin beta I'll get another way.
