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GBTC Trading Frenzy: Grayscale's Triumph Sparks Investor Rush to Capitalize on Bitcoin Price Convergence

Aug 30, 2023 at 04:14 pm

The recent ruling from the appeals court has mandated that the SEC reevaluate its previous stance on denying the Grayscale Bitcoin Trust's transformation into an exchange-traded fund (ETF).

This victory for Grayscale has triggered a surge in trading activity centered around GBTC shares, resulting in the highest trading volume observed since June 2022. While certain traders who had speculated on reducing the discount to GBTC's net asset value have seized the chance to secure profits, there remains potential for further gains if the ETF conversion proves successful. The CEO of Digital Asset Research has expressed optimism regarding this potential upside.

Grayscale's primary bitcoin fund, GBTC, played a central role in the turbulence witnessed in the cryptocurrency market the previous year.

The notable upswing in trading activity saw almost 20 million GBTC shares changing hands in a single day, marking the most active session since the cryptocurrency market crash of June 2022. As a result, the share price experienced a significant 18% surge, reaching nearly $21. This level had not been reached since bitcoin's value peaked at $31,000 in mid-July.

This bustling trading session closely followed a federal appeals court verdict, requiring the U.S. Securities and Exchange Commission to reconsider its rejection of Grayscale Investments' endeavor to convert its primary bitcoin-focused fund—managing assets valued at over $17 billion in BTC—into an ETF. Earlier this year, Grayscale's parent company, DCG, initiated the appeal, setting the stage for a legal confrontation. A successful conversion would permit redemptions and bridge the gap between the fund's share price in secondary markets and the net value per share of its BTC holdings.

In response to this news, BTC observed a 7% surge, reaching $28,000, and the discount on GBTC's share price dwindled to as low as 17% during the day.

Profiting from GBTC discount to BTC price

The discount experienced by GBTC relative to BTC's price played a pivotal role in the turbulent events of the crypto market last year. During previous crypto market upswings, GBTC shares traded at a significant premium compared to their net asset value. Notably, the crypto hedge fund Three Arrows Capital leveraged substantial bets to capitalize on this premium, only to face a significant reversal when the fund's shares transitioned to a discount in 2022 due to the decline in crypto prices. This discount expanded to 45% following the collapse of FTX, as indicated by data from CryptoQuant.

In recent months, some investors strategically acquired GBTC shares, anticipating a reduction in the discount pending a favorable court verdict. While some of these investors are now taking advantage of the decreased prices, there are still buyers entering the market, hoping for the discount's decline to continue if the ETF conversion receives approval.

Considering potential market gains alongside the discount reduction, this trade could yield an approximate return of 25%, offering an attractive opportunity for arbitrageurs, according to insights provided by Doug Schwenk, CEO of the crypto data provider Digital Asset Research.

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