Is the GBTC Arbitrage Trade Still In Play?

While the latest regulatory news had a positive result on GBTC’s overall stock price, it also positively impacted its “discount”, tightening it from 25% to 18%.

You see, although GBTC seems like a straightforward vehicle – giving investor’s a cleaner and safer way to own bitcoin rather than purchasing the underlying asset – since 2021 this hasn’t been the case.

That’s because, in February, 2021 GBTC began trading at a discount, with the price of one share being valued lower than the bitcoin it represents.

Although this was an annoying outcome for those who bought GBTC when it was trading at a premium, the discount allowed some traders to begin gobbling up shares to take advantage of the arbitrage opportunity.

At its largest discount to Net Asset Value (NAV) of nearly 50% in December 2022, investors were being given a risk averse way to buy bitcoin at a huge discount.

We even discussed the trade in December, 2022 the trade stating:

That’s because, we felt the discount had multiple ways it could close:

1. DCG, the parent company of Grayscale, could reduce its fee structure, thus giving more incentive to people to own the Trust. What many people don’t realize is that GBTC charges fees on the NAV price as opposed to the share price of the Trust, which in our opinion is disingenuous to shareholders.

2. Positive signals of a potential bitcoin ETF being approved could bring in more buyers than sellers, thus helping close the gap.

And while DCG hasn’t shown any willingness to give up its golden goose of fees, between the recent Ripple ruling and yesterday’s SEC ruling, the discount has closed to less than 20%.

So the question arises: does the trade still make sense, or is it too late?

For that, we turn to one of our favorite investors and major GBTC shareholders, Boaz Weinstein.

Now, most of you have never heard of Boaz Weinstein before. In fact, Mr. Weinstein goes to great lengths to keep a relatively low profile, but he is not only one of the best fixed-income investors of our time, he is also a major player in closed-end-fund arbitrage. You can learn more about him here.

Yesterday, Boaz tweeted that he believes the trade is no longer attractive for multiple reasons.

Let’s quickly break down what each one means.

1. Time to close. This is simple. Boaz is saying that for new buyers betting on GBTC to convert to an ETF, it may take longer than you might expect.

2. Fees. As we explained above, Grayscale charges a 2% fee on GBTC, impacting any potential gains one may derive from this trade.

3. Risk. What if an ETF is denied again? What if Grayscale is hacked? What if, what if, what if… The point here is that there is still embedded risk in GBTC, no matter how much it has decreased recently.

4. Lots of arbs potentially reducing their trade around here, it’s time to move on. Boaz believes that a lot of traders that invested in GBTC for the arbitrage opportunity may be exiting their positions, thus putting sell pressure on the stock. He believes it’s time for investors who are only in the trade to play the arbitrage opportunity to move on to another trade… maybe even backing him as he fights Blackrock.

Our take

As much as people take jabs at DCG, GBTC, and Barry Silbert, we have to admit that the launch of GBTC was a pivotal moment that brought a huge amount of investors into crypto that may not otherwise have joined.

With that being said, we tend to agree with Boaz here that for investors looking to simply partake in an arbitrage trade, this may not be the best one to go with now.

But, for those that fundamentally believe in bitcoin, believe an ETF will be approved, and want to juice their returns by a potential 15 - 20%, buying GBTC today is a good way to play it.

Just be careful. With all the recent negative happenings at Grayscale’s parent company DCG, there is more incentive than ever for the company to keep fees at the highest point possible.