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Grayscale wants to turn a giant Bitcoin fund into an ETF. Why this is such a big deal.

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Grayscale Investments, manager of the world’s largest publicly traded Bitcoin fund, said it intends to convert the $ 34 billion trust into an ETF when regulators allow it, a move that could preserve its advantage. in cryptocurrency investing as other companies look to make similar moves.

It’s a topic Grayscale has been examining closely from a business and regulatory perspective for several years, the company wrote in a Monday article.

Grayscale, a subsidiary of Digital Currency Group (Symbol: DCG), has been a pioneer in digital asset management. He launched the

Bitcoin Trust in Grayscale

(GBTC) in 2013 and many other crypto products, such as the Grayscale Ethereum Trust (ETHE), in the following years.

The news came as the Bitcoin Trust has been trading at a discount to its net asset value for more than 30 days, an unprecedented trend reversal since the closed-end fund entered the market in September 2013.

US regulators have not approved any Bitcoin exchange-traded funds, so the Grayscale Trust has been one of the few options for people who want exposure to Bitcoin through the stock market. High demand and limited supply meant that the units of the fund were bid for more than the value of their share of the Bitcoin held by the trust.

The recent haircut on Grayscale shares suggests that investors have sold their positions in the trust, possibly in anticipation of the upcoming approval of

Bitcoin ETF

s. These funds are expected to charge significantly less than Grayscales’ 2% management fee, which is significantly higher than most index ETFs or commodity-backed funds. It even exceeds the cost of many actively managed funds.

The company said in its Monday announcement that the management fee would be reduced if the fund converts to an ETF, but it did not disclose the new number.

The Grayscale Trust also has other drawbacks compared to a Bitcoin ETF. Investors who subscribe to new shares issued by the fund must wait six months before they can trade those shares in the secondary market, while investors in ETFs do not face this type of restriction.

The price differential of funds against Bitcoin – sometimes quite large – is also undesirable for investors who want to follow the performance of digital currency without the impact of other factors. Market makers are free to create and redeem ETFS shares, so that any difference between their prices and the value of the underlying assets is immediately arbitrated.

Either way, Grayscale might not be the only game in town for a long time. Investors were eagerly awaiting a US-listed Bitcoin ETF that would allow individuals, financial advisers and institutional investors to easily access digital assets in the form of a security. While anyone can buy and own Bitcoin today, it remains difficult for regular investors with brokerage accounts to manage cryptocurrencies as part of their wallets.

Canada authorized its first Bitcoin ETFs in February, and a few more in the following weeks. The first and the biggest,

Bitcoin ETF objective

(BTCC), amassed $ 1.2 billion in assets under management just two months after going public.

In the United States, a handful of companies have applied for approval of Bitcoin ETFs with the Securities and Exchange Commission, but most have either withdrawn or rejected their proposals. The agency said it was concerned about volatility, price transparency and potential fraud and manipulation in the crypto markets.

Grayscale first submitted a Bitcoin ETF application in 2016, but then withdrew it. Companies that currently have active SEC applications include giant funds Fidelity Investments, VanEck,

WisdomTree Investments

(WETF), SkyBridge Capital, Valkyrie Digital Assets and NYDIG Asset Management. A recent filing from Fidelity, in particular, raised expectations for a US Bitcoin ETF.

Grayscale, of course, is not going to sit idly by and wait for its fund to go stale as ETFs emerge. To stay in the game, converting to ETFs when the regulatory environment allows it seems quite natural. Monday’s announcement, even without an official filing, has the potential to help ease the bearish sentiment that has dragged grayscale stocks below their NAV.

We want to make sure that all of our investors know that it is 100% our intention to convert this product into an ETF, said Michael Sonnenshein, CEO of Grayscale. Barrons.

If it gets approved, a grayscale Bitcoin ETF would be much better positioned than its potential rivals. The size, liquidity and branding of funds are unprecedented among investment products in the digital currency space.

If Bitcoin were a commodity, a grayscale Bitcoin ETF at today’s size would be the second largest commodity ETF in the world, ranking only behind $ 57 billion.

SPDR Gold Trust

(GLD). It would also be the third most liquid commodities ETF in terms of weekly trading volume, according to the company. Only the SPDR Gold Trust and iShares Silver Trust (SLV) are larger.

In addition, the Grayscale Trust is already owned by star manager Cathie Woods ARK Investments Management. Many large institutions, including

Morgan stanley,

also currently have indirect exposure to Bitcoin through the Grayscale fund. They are likely to remain if the converted grayscale ETF offers similar fees and services to those offered by its competitors.

We are very confident in our positioning both in the market and in our engagement with regulators, said Sonnenshein. The fund would also be the only one with a history of compliance with SEC regulations regarding disclosure and other transactions, it adds.

Existing shareholders of the Grayscale fund would not need to take any action if the conversion goes through, according to the company. The fund currently only trades through the over-the-counter market, but if it were an ETF, it would transfer to national exchanges like the New York Stock Exchange and the Nasdaq.

Shortly after the conversion, the price differential with Bitcoin – whether it was a premium or a reduction at that time – would likely disappear, meaning that investors who bought the fund with a reduction could see gains regardless of fluctuations in the price of Bitcoins.

The fund jumped 4.1% during trading on Monday, while the price of Bitcoin only rose 1.3%, although the units are still trading at a discount to the cryptocurrency.

Write to Evie Liu at [email protected]

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