The Pomp Letter - VIX Creator Wants GBTC Converted To ETF
To investors, Many people may not realize though — GBTC was a major driver in bitcoin’s increase in price from ~ $10,000 in October 2020 to $64,000 in March 2021. Without getting too deep into the details, GBTC does not have a redemption functionality. This means that you could go to Grayscale and give them money in the private market. They would take your money to go purchase bitcoin for the fund. In return for your money, Grayscale would give you shares in GBTC under one condition — you were not allowed to trade those shares for 6 months. So a bunch of very smart investors started giving Grayscale millions of dollars in the private market. But why would they do that? Well, at the time, if you gave Grayscale $1 in the private market, then waited for 6 months and 1 day, you would be able to sell that sale at a premium in the stock market for approximately $1.20. This means that the GBTC shares were trading at ~ 20% premium to the value of bitcoin in the fund (NAV). You can easily understand why so many people were giving them money to exploit this detail. Here is Grayscale’s bitcoin holdings over the years and the ramp up in 2020-2021 is very obvious. The premium percentage went up and down, including reaching as high as 40% at one point, but it was always positive. It doesn’t take a genius to understand that giving someone $1 and being able to sell it for $1.20 about 6 months later is a good investment. This wasn’t risk-free though, so what was the risk? What happens if so many people realize that you could do this that the premium went away and eventually became a discount? That couldn’t happen, right? You guessed it — it happened. Grayscale’s Bitcoin Trust now trades at a 30% discount to the value of the fund. No one wants to give Grayscale $1 and get $0.70 for it 6 months later, so the fund has stopped taking inflows at the moment. Now here is where things get a little weird. Grayscale has about $20 billion of assets (at current BTC price) sitting in a fund, but the shares are trading at 30% less than that value. So if you’re holding the shares, which have gone done significantly, you would just want to tell Grayscale “hey, I’ll give you my shares and you give me back the equivalent bitcoin.” That sounds like a good idea but Grayscale doesn’t have a redemption feature. This is one of the big reasons why the company has been spending so much time trying to get the SEC to approve a conversion from the trust structure to a bitcoin spot ETF structure. If they are successful, investors will rush to buy the shares at a discount so they can redeem the bitcoin, which is worth more, driving a profit. As more investors buy the shares, the price will go back up towards the value of the fund and everything in the world will be good again. The problem is that the SEC hasn’t been too interested in this idea. SEC Chairman Gary Gensler and his team have approved bitcoin futures ETFs in the United States, but there is no bitcoin spot ETF yet. Other countries have them. The United States does not though. So this brings me to a development yesterday that is very interesting. There is a man named Robert Whaley who wrote a letter to the SEC about the Grayscale ETF conversion issue. He isn’t just a random guy, but rather Whaley created the Cboe Volatility Index (VIX) in the early 1990’s. It would be an understatement to say that Robert Whaley understands financial markets, indexes, and trading products or structures.
Robert’s argument breaks down into three distinct categories:
Makes sense, right? Robert Whaley ends his letter with a synopsis of why Grayscale’s Bitcoin Trust should be approved in his opinion:
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