On this episode of the “ETF of the Week” podcast Tom Lydon discussed the Grayscale Bitcoin Trust (GBTC) with Chuck Jaffe. The pair discussed several different topics regarding GBTC and its journey with the SEC to convert this trust into an ETF.
Chuck Jaffe: One fund on point for today and the expert to talk about it, welcome to the ETF of the Week. It’s the ETF of the Week where we get the latest take from Tom Lydon, Vice Chairman at VettaFi, where they have everything you need to be a smart, savvy, sound investor in exchange traded funds. It’s Vettafi.com, and Tom Lydon their vice chairman, well, he joins me every week with something that he sees happening and that he thinks you should know about in the ETF industry. Tom, great to chat with you again.
Tom Lydon: Great to be back. Thanks, Chuck.
Chuck Jaffe: Your ETF of the week is…
Grayscale Bitcoin Trust
Tom Lydon: The Grayscale Bitcoin Trust, ticker symbol GBTC.
Chuck Jaffe: Wait, wait, wait. The Grayscale Bitcoin Trust, because ticker GBTC is not an ETF, so how can we have a not ETF for the first time in the history of the ETF of the week be the ETF of the week?
Tom Lydon: It’s an important day, Chuck, the first time that we’re doing this, but there’s a good story behind it where in fact this trust may turn out to be an ETF, fingers crossed. So let me give you a little bit of the backstory. Grayscale put GBTC together a while ago. Had at one point something like $7 billion. I think there’s about $4 billion in this now, but it’s not an ETF.
It’s a trust and it almost trades like a closed-end fund where you can actually have a premium or a discount on the underlying holdings. Bitcoin was out of favor. There was almost a 30% discount on this trust. So, with that complication and the fact that there was not a spot Bitcoin ETF, Grayscale put a lot of work together, applied to the SEC to convert this trust into a spot, Bitcoin ETF, and in fact was denied, even though there were futures-based Bitcoin strategies in ETFs out there.
SEC and Grayscale
Fast forward, they sued the SEC… Grayscale sued the SEC in the DC Circuit Court of Appeals and won, and the SEC had 45 days to appeal that decision and that deadline was last Friday, October 13th. They did not appeal. At the same time, there are almost 10 other ETF issuers out there that have put in applications for spot Bitcoin ETFs, and the SEC is having conversations with them. They’re trying to understand a little bit more about how they would be put together. In some cases, there have been amendments to the applications, so there are ongoing discussions.
The fact that the SEC did not appeal that decision means that they’re going to have to get Grayscale on the phone. They’re going to have to have discussions. They’re going to have to talk about moving forward. And there’s a good chance… Again, we don’t have any inside information. Nobody from any of the ETF issuers or Grayscale have told us about any conversations with the SEC, but just by the path that we’re going on, we may by the end of the year or early next year see a spot Bitcoin ETF.
Bitcoin ETFs and Ether ETFs
Chuck Jaffe: Now, we should point out there are Bitcoin ETFs and Ether ETFs now as well. We’ve just had some expansion into some of the other cryptos, but they’re not a spot bitcoin ETF or crypto ETF. And for anybody who’s not familiar with the term or is not a hundred percent sure, spot is… That means they invest in the coin and they trade at the value of the currency. So a spot gold fund holds gold bars rather than say investing in gold miners or gold futures. To this point, any ETF that has been in cryptocurrency has been doing the future.
So we’re talking about GBTC. If it is allowed to convert, would it be therefore the first spot gold ETF? And if that’s the case, conversion note, you mentioned that it’s like a closed-end fund. We talk a lot on my show, Money Life about closed-end funds. People want to get stuff at discounts and want to have activist investors come in and go, “Make that a traditional fund. Make that an open-ended fund.” And at that point pops up to net asset value. So is there a little bit of a buying play here, arbitraging the SEC, where if you’re buying this fund and the case goes through, it’s going to start trading at net asset value and you capture the discount?
Is There an Arbitrage Opportunity?
Tom Lydon: Well, you touched on a lot of things there, and you’re right, Chuck, there may be an arbitrage opportunity at one point in time. Again, as I mentioned, there was over a 30% discount. That discount has been shrunk to 15%, but there’s still a discount. But you’re almost making a bet because if this does not go through, it will continue to trade at a discount or potentially a premium at one point in time. I’m not sure that I’m in a position to recommend that people take advantage of that. I think the biggest thing here, and the big story is the average investor and the average financial advisor may now with a spot Bitcoin ETF feel comfortable getting access to the crypto market because by buying an ETF, you’re buying through a brokerage company and all the due diligence that’s done.
Again, there’s never a guarantee that it’s going to be a hundred percent safe. Obviously, the SEC has had its reservations as well, but we’re surveying advisors every year with the folks over at Bitwise. Five years we’ve had the survey, but still, only 29% of investment advisors feel comfortable that they have access to cryptocurrency for their clients. Now, we feel that if there is an approval of one or many spot Bitcoin ETFs, we’re going to start to see advisors take maybe small allocations for their clients in their brokerage platforms, and a little bit for a lot of advisors who have a lot of clients, could actually be very favorable for the crypto markets.
Difference Between a Spot ETF and a Futures-Based ETF
Chuck Jaffe: It could be. And it’s important to note that the difference between a spot ETF and a futures-based ETF is that you could be a diehard crypto believer. If you own a futures-based ETF, you’re going to get a lot of distortion in that price. In other words, the fund may go up or down based on what’s happening to the price of Bitcoin, but futures funds trade in a much more volatile way, and they don’t tend to track the thing that they are tied to the way a spot fund does. So, the bigger thing is it’s a long-term investment.
Tom Lydon: Yeah, I would say, Chuck, the good news is we have enough time where those futures-based Bitcoin strategies and ETH strategies have correlated pretty tightly. I mean, that’s the reputation of those companies and those products. And if you actually have seen a lot of volatility or it doesn’t correlate with the spot price, you’re not going to get a lot of people investing in it. They have pressure to make sure that there’s a very, very tight correlation between the spot price and the price within those futures-based strategies. But if we see a spot ETF, we’re probably not going to see as much traction in those futures-based strategies.
Chuck Jaffe: It’ll be interesting to watch, and that’s what’s happening here. It’s on the watch list. It can’t really be the ETF of the week when it’s not an ETF. But it is the Grayscale Bitcoin Trust, ticker symbol GBTC, the ETF of the week from Tom Lydon. Tom, great stuff as always. Thanks again for joining me.
Tom Lydon: Thanks, Chuck.
Chuck Jaffe: The ETF of the Week is a joint production of VettaFi and Money Life with Chuck Jaffe. And yeah, that’s me. If you want to learn all about my hour-long weekday podcast, go to moneylifeshow.com or search for it wherever you find good podcasts. And if you want to get good information on investing in exchange traded funds, there’s no better place than Vettafi.com. They have a great suite of tools that will help you do everything you want to be a savvier and smarter investor in exchange traded funds. They’re on Twitter @Vetta_Fi, and Tom Lydon, their vice chairman, my guest, well, he’s on Twitter too. He is @TomLydon. The ETF the Week is here for you every Thursday, and we’ll be back next week. Until then, that’s investing.
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