A host of Wall Street funds have minted profits riding the recent crypto fever after Grayscale Investments LLC snagged a big win over America’s top financial watchdog in its bid to create a US Bitcoin ETF.
Money managers including the likes of Cathie Wood and Boaz Weinstein appear to have been well positioned for the crypto firm’s victory, after scooping up shares of the Grayscale Bitcoin Trust at the height of its recent distress.
The court ruling late last month against the Securities and Exchange Commission spurred a rally for GBTC, as the $16.6 billion product is known, on bets it could soon be transformed into the first US spot Bitcoin ETF.
Those gains dramatically narrowed the trust’s discount to underlying assets. While GBTC still trades at a price below the value of its holdings, it means anyone who invested at a steeper markdown is sitting pretty.
An analysis of industry filings shows that firms including Wood’s ARK Investment Management, Weinstein’s Saba Capital Management, and the hedge fund Fir Tree built sizable stakes in GBTC in the months before the verdict.
“We saw the Grayscale case, we saw some of the judge’s comments and were saying, ‘The SEC’s going to lose this, and that will help this discount,’” Wood said in an interview. “We thought the discount was going to close — and it has closed some, but not altogether.”
Fir Tree bet around $60 million on the dislocation narrowing, mostly in the fourth quarter of 2022 when the average discount was about 42%, according to a person familiar with the trade who asked not to be identified because the information isn’t public. The hedge fund made a return of about 40%, the person said.
GBTC’s dislocation has narrowed to close as low as 17% this week from a record 49% in December, according to data compiled by Bloomberg. The discount remains because although the appeals court overturned an SEC decision that blocked Grayscale’s bid to convert the trust into an ETF, the crypto firm faces many more hurdles before it can complete the switch. Grayscale declined to comment.
Wood’s $1.4 billion ARK Next Generation Internet ETF (ticker ARKW) snapped up GBTC last November, when the discount was around 40%. The trust remains the third-largest holding in the fund, which has returned about 52% this year through Thursday.
At Saba, GBTC was among the largest holdings in Weinstein’s $364 million Saba Capital Income & Opportunities Fund (BRW) through the end of July, according to the latest available data. The fund took its position in April, according to data compiled by Bloomberg, a month in which the trust discount averaged about 38%. It reduced holdings partially in July, when the dislocation averaged 27%.
A spokesperson for Saba declined to comment. BRW gained 11.4% year-to-date through Wednesday, beating 61% of peers, Bloomberg data show.
Endgame in Sight
GBTC’s discount is a function of its architecture, and one of the main reasons Grayscale wants to turn it into an ETF. Should it succeed, the markdown would theoretically evaporate altogether.
While new shares can be created when cash flows into the fund, unlike in an ETF they can’t be redeemed when investors wish to exit. That has left GBTC operating effectively as a closed-end fund, liable to trade at a premium when demand is high and slump to a discount when it’s low.
The crypto firm sued the SEC in June 2022 after the regulator rejected its bid to convert GBTC into a spot Bitcoin ETF, despite allowing Bitcoin futures ETFs to launch in October 2021. Optimism that Grayscale would win the case helped narrow the discount in the weeks leading up to the verdict.
Aristides Capital LLC is still engaging with the arbitrage, according to Chris Brown, managing partner. The Louisville, Kentucky-based hedge fund first began trading GBTC shares in late 2021, and held $13.3 million worth through the end of June, Bloomberg data show.
Aristides initially trimmed some of its GBTC holding after the appeals court overturned the SEC’s decision, but quickly reversed course. It has re-added to its position, Brown said, in a bet that the discount has further to shrink.
“There’s just not a good, strong legal argument for keeping this from becoming an ETF,” said Brown. “I think the endgame is in sight at this point.”
Conversion Doubts
Industry watchers say the Grayscale victory, while important, is no green light to list a spot Bitcoin ETF.
The SEC has a 45-day period to appeal the court decision and has yet to respond to the loss. At a minimum, the regulator could simply ask Grayscale to reapply, effectively restarting the process from scratch.
Shortly after the Aug. 29 verdict, Weinstein posted on X, the platform formerly known as Twitter, that it’s “time to move on” from the GBTC trade. With the discount hovering between 15% to 18%, the bet is “no longer attractive” given factors such as fees and other arbitragers potentially closing out their own trades.
“This discount will continue to widen over the next few weeks” until there is more certainty around Grayscale’s conversion efforts, said Steven McClurg at Valkyrie Investments.
The Nashville, Tennessee-based firm has jumped in and out of the trade. Its Valkyrie Opportunistic Fund, which returned 42% this year through the end of August, had initiated positions in January when the discount was roughly between 35% and 45%. The fund had approximately 80% of its assets in Grayscale products leading up to the court decision.
Valkyrie is continuously looking for the right moment to add back its exposure, according to McClurg.
“We’re opportunistically looking for entry points back in,” said the chief investment officer, who was involved with closed-end fund takeovers and restructurings in his prior role at Guggenheim Partners.
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