GBTC jumps this week while Grayscale CEO ‘encouraged’ after oral arguments in court battle with SEC over spot bitcoin ETF

Grayscale Investments’ Bitcoin Trust has soared this week, while the firm’s chief executive officer is feeling encouraged about its legal battle to convert the investment vehicle into an exchange-traded fund.

The crypto asset manager has been in litigation with the U.S. Securities and Exchange Commission, which it sued after the regulator rejected its application to convert the Grayscale Bitcoin Trust into a spot bitcoin ETF. Oral arguments were heard last week by the D.C. Circuit Court of Appeals.

“Walking out of the courtroom,” said Grayscale’s CEO Michael Sonnenshein in a phone interview, “we were really encouraged.” That sentiment was based on how Grayscale’s arguments “landed with the judges,” said Sonnenshein, adding he expects the court could make a final decision by the end of the third quarter.

The Grayscale Bitcoin Trust, known by its ticker GBTC, has jumped 20% this week through Tuesday, closing above its 200-day average, according to FactSet data. The trust ended trading Tuesday at a 41% discount to its underlying holding, a discount that would disappear should Grayscale win its lawsuit and succeed in converting the trust to a spot bitcoin ETF. 

That means existing investors stand to see a big price return should the conversion potentially happen. According to Sonnenshein, Grayscale set up GBTC as a private fund in 2013 with the idea that it would move to the public market, as it did in 2015, and eventually become an ETF. 

But in June, the SEC rejected the firm’s application to convert it to a spot bitcoin ETF. Grayscale called the rejection “arbitrary and capricious” at the time. 

The regulator has approved bitcoin futures ETFs, so it’s comfortable with a derivative of the “robust spot market” for bitcoin, Sonnenshein said. The SEC is “looking at two very alike issues and treating them differently,” he argued, saying there’s “a near perfect correlation” between bitcoin futures and spot prices of bitcoin. 

A spokesperson for the SEC said the agency declined to comment beyond public filings on the lawsuit. 

Meanwhile, bitcoin
BTCUSD,
+1.05%
rose for four straight days through Tuesday, based on 5 p.m. Eastern time levels, rising 22.8% over this period to $24,674, according to Dow Jones Market Data. Prices of the cryptocurrency were trading at around $25,000 Wednesday morning, CoinDesk data show, at last check. 

Meanwhile, shares of the ProShares Bitcoin Strategy ETF
BITO,
-0.89%,
which invests in front-month bitcoin futures, rose 3.3% Tuesday for a week-to-date gain of 26.3%, according to FactSet data. 

The ProShares Bitcoin Strategy ETF, which had $799 million of assets under management on Tuesday, was launched in October 2021, FactSet data show. 

GBTC is much bigger. Grayscale’s bitcoin trust
GBTC,
+0.12%
had $15.8 billion of assets under management on March 14, according to the firm’s website. Shares of the trust ended Tuesday at $13.49 and were down around 1.9% in Wednesday morning trading, FactSet data show, at last check.

The investment vehicle would stop trading at a discount to holdings after converting to an ETF because of the mechanics of exchange-traded funds, said Sonnenshein. The ETF structure allows for a creation and redemption process that would “keep the shares trading in line with the underlying bitcoin that the fund holds,” he said. 

Sonnenshein estimated that about a million investor accounts in the U.S. hold GBTC and said investor exposure may be larger than that as the trust is also held in structures such as mutual funds. 

Meanwhile, the U.S. stock market was trading lower Wednesday morning amid investors’ ongoing worries over the banking system. The Dow Jones Industrial Average
DJIA,
+0.01%
was down 1.4%, while the S&P 500
SPX,
+0.36%
fell 1.3% and the technology-heavy Nasdaq Composite
COMP,
+0.76%
shed 1%, according to FactSet data, at last check.