Is the GBTC Discount to NAV a Good Arbitrage Opportunity?
The Grayscale Bitcoin Trust (GBTC) has been trading at a significant discount to its net asset value for several months.
Grayscale Investments’ victory in court against the Securities and Exchange Commission in August means the SEC must reconsider Grayscale’s application to convert its GBTC fund to a spot bitcoin ETF. Because analysts predict a 90% chance of an SEC spot bitcoin ETF approval by January, traders recognize that the window of opportunity to profit from a GBTC discount may be closing soon.
Why GBTC Trades at a Discount
The reason why GBTC trades at a discount to its NAV is primarily because of its structure as a closed-end fund, or CEF. Closed-end funds can be less liquid than ETFs, which are open-ended funds. The limited number of shares outstanding can result in wider bid-ask spreads and reduced liquidity for CEFs. If there aren't enough buyers, a closed-end fund can trade at a discount. Sometimes CEFs trade at a premium.
Some investors actively seek out CEFs trading at discounts as an investment opportunity, anticipating the discount will narrow over time, potentially providing a profit when the market price converges toward the NAV.
Closed-End Funds vs ETFs
The main difference between closed-end funds and ETFs is that unlike ETFs, CEFs can’t create or redeem shares on a daily basis. Instead, CEFs come to market through an initial public offering with a fixed number of shares. Like ETFs, CEFs trade intraday on an exchange, which means CEFs may trade at premiums or discounts to their NAV.
This underlying structural difference in the creation/redemption process is what makes discounts more common with CEFs than they are with ETFs, whose prices tend to trade much closer to their NAVs.
GBTC Discount and Arbitrage Pros and Cons
Arbitrage is a trading strategy that aims to profit from the price differences of an asset or security in different markets, attempting to exploit the price differential to generate a “risk-free” profit. As of Nov. 10, GBTC was trading at a price of 29.97 and its NAV was 32.80. That represents nearly an 11% discount. Although GBTC, which is backed by bitcoin, may still see price volatility, the discount is expected to narrow as traders increasingly expect a spot bitcoin ETF approval.
Traders believe that, if and when the SEC approves a spot bitcoin ETF, GBTC will convert to an ETF, providing more liquidity, thereby narrowing the discount further.
While the GBTC discount has been wider and could widen again, 11% is arguably a sizable discount in the eyes of traders who believe that a spot bitcoin ETF approval could come any day now, or at least by January.
Investors should keep in mind that arbitrage opportunities usually exist for only a brief period, as market participants quickly act to eliminate price discrepancies. Cryptocurrency markets can be volatile and unpredictable. Price discrepancies can widen or disappear rapidly because of sudden market movements, news events or changes in investor sentiment, affecting the potential profitability of an arbitrage trade.
