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Edited by Ritu13 at 22-12-2023 01:58 PM
At Grayscale, we believe that the approval of a spot Bitcoin ETF by U.S. regulatory agencies is a "when" question rather than an "if" question.
We remain focused on listing GBTC as a spot Bitcoin ETF on NYSE Arca. While the timeline is inherently uncertain, looking ahead, we engaged in a discussion with Grayscale's Chief Legal Officer Craig Salm and Chief Financial Officer Edward McGee to address some common questions from investors and other market participants regarding the process and implications of products like GBTC being listed on a securities exchange, including the process of listing GBTC on NYSE Arca and what it means for investors when GBTC trades as an ETF.
Q: First, can you give us an overview of how ETFs generally operate?
A: ETFs are investment products whose shares trade on a national securities exchange (such as NYSE Arca, Nasdaq, or CBOE). ETFs can conduct both share creation and redemption, designed to allow ETF shares to trade at their net asset value (NAV) or the value of the assets they hold.
Market participants known as authorized participants (APs), primarily broker-dealers with certain regulatory qualifications, are incentivized to create ETF shares when their trading price is above the NAV and redeem ETF shares when their trading price is below the NAV. APs are typically the only market participants that can engage in these types of transactions with the ETF. These creation and redemption transactions provide an opportunity for APs to profit through an arbitrage mechanism, which is an incentive for ensuring the ETF tracks the value of its underlying assets. ETFs that closely track their NAV can also encourage non-AP brokers and investors to buy and sell shares on the open market without creating or redeeming shares. The higher the liquidity and trading volume of ETF shares, the less dependent they are on creation and redemption transactions.
Q: How does GBTC currently operate?
A: GBTC is an investment trust that owns over 3% of the total circulating Bitcoin. As of November 29, 2023, each GBTC share is backed by 0.0008968 BTC. GBTC owns nothing other than Bitcoin, and it does not use leverage or derivatives such as Bitcoin futures contracts. The underlying Bitcoin tokens are held in secure offline storage. Grayscale is responsible for the day-to-day management of GBTC, including overseeing custody relationships, communication with regulatory authorities, tax reporting, financial statements, and other requirements for publicly traded investment instruments.
GBTC shares have historically been issued through a private placement process, exempt from registration under the Securities Act of 1933. Initially available only to accredited investors and subject to holding periods under Rule 144, GBTC shares cannot be redeemed. To provide liquidity, GBTC obtained public quotation on the OTCQX market in mid-2015. Since then, any investor with access to the public market has been able to trade freely tradable GBTC shares, allowing them to increase their exposure to Bitcoin in investment accounts.
However, due to Rule 144, newly created shares must go through a holding period, and if the trading price of GBTC shares on OTCQX is higher than GBTC's NAV, APs cannot create more shares to add them to the market and adjust the price according to GBTC's NAV. Conversely, since GBTC does not offer a redemption program, if the trading price of GBTC shares is lower than GBTC's NAV, APs cannot redeem shares to remove them from the market and adjust the price according to GBTC's NAV. Therefore, GBTC cannot rely on the inherent arbitrage mechanism described for ETFs. GBTC shares can and have traded at premiums and discounts to net asset value.
The innovation of the ETF product structure lies in its arbitrage mechanism, which allows for continuous creation or redemption of shares to address premiums and discounts.
It is crucial to note that in the ETF model, GBTC shares are expected to more closely track the price of Bitcoin, meaning any premiums or discounts to the GBTC stock price are expected to disappear. As of November 29, 2023, GBTC's assets under management are $23.4 billion, and its trading discount is 8.09%, or $1.89 billion. This means that, assuming the current discount disappears, GBTC, when listed on NYSE Arca and functioning as an ETF, would release approximately $1.89 billion in value to investors through the arbitrage mechanism.
Q: What will happen if the SEC grants regulatory approval to allow a spot Bitcoin ETF into the U.S. market, and GBTC is allowed to list on NYSE Arca?
A: The creation of GBTC shares will be registered with the SEC through an S-3 filing under the Securities Act of 1933. The redemption of GBTC shares is expected to be exempt under the SEC's previous Regulation M exemption granted for products with similar characteristics. This will provide the necessary approvals for GBTC to simultaneously create and redeem shares, allowing arbitrage opportunities when there is a premium or discount between the trading price of GBTC shares and GBTC's NAV. Once the SEC |
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Post time 9-12-2023 13:23:55