The court is set to deliver its ruling on Grayscale Investments’ lawsuit against the US Securities and Exchange Commission. Regardless of the outcome, it holds the potential to significantly impact the company’s flagship bitcoin trust and the discount at which its shares currently trade.
Grayscale sued the SEC in June 2022 after the regulator blocked it from converting its Bitcoin Trust (GBTC) to an ETF. The firm had argued to the DC Circuit Court of Appeals that the SEC’s approval of ETFs investing in bitcoin futures contracts, but not proposed products that would hold bitcoin directly, is “arbitrary and capricious.”
Eligible shares of GBTC — currently with $16.2 billion in assets — are quoted on OTC Markets Group’s OTCQX. Those shares have traded at a premium or discount to the value of bitcoin held by trust as demand for the product fluctuates.
Read more: First bitcoin futures ETF nears $1B on first day of trading
GBTC was trading at a 26% discount to its net asset value (NAV) on Friday, according to YCharts.com. It had fallen to just below 24% on Aug. 14 — down about 20 percentage points from roughly 44% on June 13.
“The strong narrowing of it shows how the perceived likelihood of an ETF spot approval in the US in the future strongly increased, pushing investors to buy the GBTC at a strong discount, believing in a future ETF listing,” Fineqia research analyst Matteo Greco said in a Monday research note.
What the discount could do after the court ruling
Chase White, senior research and policy analyst at Compass Point Research & Trading, anticipates that the GBTC discount might “close significantly” following a Grayscale victory, perhaps narrowing to as much as 10%.
“However, we don’t think it’ll close entirely because we think in the days [or] weeks following the decision, the market will begin to digest the fact that Grayscale’s win does not mean immediate approval to convert GBTC into an ETF,” he told Blockworks.
Read more: Grayscale win over SEC might not change much, industry watchers say
The court will likely require the SEC to re-review Grayscale’s application, forcing the crypto asset manager to re-apply with the regulator. That process could take up to 240 days — a procedure other prospective spot bitcoin ETF issuers are in the midst of.
Bloomberg Intelligence analyst James Seyffart said an official announcement and timeline of a GBTC conversion to an ETF would send GBTC to “a near-zero discount.”
The main reason for GBTC’s discount is Grayscale’s inability to simultaneously redeem and issue shares, White explained — allowing the discount to NAV to be arbitraged away in real-time.
“There’s no mechanical reason the discount would disappear entirely before the SEC approves the conversion to an ETF and Grayscale starts actively issuing [and] redeeming shares,” White added. “Also, the threat of an SEC appeal could dampen the positive sentiment once that reality sets in.”
Should the DC Circuit Court of Appeals rule in favor of the SEC, industry watchers said the specifics of the decision will be key.
The court accepting the SEC’s concerns about market manipulation as valid — giving it reign to reject spot bitcoin ETFs — would likely drive a bigger discount than if it ruled Grayscale’s application was “simply deficient” as it currently stands, White said.
GBTC reached a record discount to NAV of nearly 50% in December 2022.
“It wouldn’t be crazy to see it head in that direction again if Grayscale loses,” Seyffart said.
Greco told Blockworks that while a Grayscale loss would result in many investors selling shares of the trust, he doesn’t expect the discount to return to the 40%-plus level.
When will the court make a ruling?
The DC Circuit Court of Appears ruling is imminent, and some expect it to be very soon.
In fact, Bloomberg Intelligence analyst James Seyffart had predicted the ruling to come on Aug. 15, a date he called “an educated guess.”
On Aug. 10, Scott Johnsson, a general partner at Van Buren Capital, said in a post on X, formerly known as Twitter, that 156 days had passed since the oral arguments in the Grayscale-SEC case. He pointed out that the DC Circuit Court of Appeals delivered rulings for nearly all cases presented in March 2022 within 154 days. The exception, he mentioned, took 170 days for a decision.
He said last week that he expected the court decision to come on a Tuesday or Friday in August, noting those are the two weekdays the court typically publishes its decisions.
“Why should we expect August?” Johnsson wrote in a separate post on X. “Because law clerks for DC generally cycle in/out this month, so judges aim to clear [the] prior caseload before the new guard arrives.”
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