The Grayscale Bitcoin Trust discount is tempting. Because it’s not a Slam Dunk.

There is a way to buy Bitcoin for almost a third less than the market price, but investors do so at a risk.

This is the general lesson to be learned from his sufferings

Grayscale Bitcoin Trust

(ticker: GBTC), a closed-end trust solely focused on holding the digital token. It is the largest such fund in the world, with approximately $12 billion in assets under management.

For an investor, the fund has long been seen as an attractive way to get exposure to crypto, despite the 2% annual management fee.

This is partly because it is easy to hold in a brokerage account along with other stocks and brokerage funds, as opposed to owning Bitcoin directly, which often has to happen through a crypto trading platform such as

Coinbase
.

Lately, the fund has also been tempting because it trades at a steep 31% discount to its underlying holdings. So for every $12.06 that investors spend on a share of GBTC, they theoretically own $17.41 worth of Bitcoin.

The problem? Erasing that discount looks increasingly distant.

The latest blow came this week when the Securities and Exchange Commission denied Grayscale’s bid to convert the trust into an ETF.

Grayscale and its investors have called for the conversion because it would allow institutions to eliminate the discount through the normal process of redeeming the fund’s shares, resulting in a near-automatic profit for those investors who held on.

Although the SEC last year approved an ETF holding Bitcoin futures contracts, it has resisted such a ruling on a spot ETF, citing potential manipulation in crypto exchanges among other issues.

On Thursday, the trust’s price fell nearly 9.5%, even as its holdings fell 6.5%, perhaps reflecting investor frustration.

Grayscale immediately sued the SEC after the rejection, calling the decision arbitrary and capricious.

“Of course, we strongly disagree with the decision they made,” Grayscale Investments CEO Michael Sonnenshein said in an interview, noting that the fund’s discount is “representative of what is now billions of dollars of unrealized shareholder value.”

Sonnenshein said his firm, in addition to the lawsuit, is talking to regulators and staff for lawmakers on the Senate Banking and House Financial Services committees who may have influence.

An SEC spokeswoman declined to comment.

For GBTC investors, however, it is difficult to envision a positive outcome, at least in the short term.

First, there is the court case. In anticipation of the rejection, Grayscale has bolstered its legal team, hiring former solicitor general Donald B. Verrilli Jr., considered an expert on the type of legal claim Grayscale is making to overturn the decision. Sonnenshein said the case could unfold in less than a year.

However, long-time observers of such cases are less optimistic.

“This appeal will likely last longer than Biden’s first term as President,” Cowen analyst Jarrett Seiberg wrote in a research note, calling it a “high hurdle” for a court to overturn the decision.

It’s also unclear how much pressure lawmakers can realistically put on the SEC to change course.

On Friday, Senate Banking Committee member Pat Toomey (R., Pa.) on Twitter exhausted the SEC to reject Bitcoin ETFs, saying that SEC Chairman Gary Gensler had “imposed enormous costs on investors without legitimate rationale.”

But lawmakers may shy away from tough debates on the decision.

“It’s hard to see a legislator taking a stand with Bitcoin prices down so much and other tokens struggling. That’s why there can be rhetoric, but not action,” Seiberg wrote.

For his part, Grayscale’s Sonnenshein says his trust’s investors are willing to wait it out and are well aware of the ups and downs of both the Bitcoin and ETF conversion race.

“These people tend to have a long-term time horizon for their cryptocurrency investment,” he said. “They can buy into the volatility and know the arguments we’ve had in front of regulators for years.”

There are other ways for investors to gain access to Bitcoin, such as directly through crypto platforms like Coinbase and FTX or through a Bitcoin futures ETF like ProShares Bitcoin Strategy (BITO).

These types of vehicles do not offer investors any kind of discount for buying crypto.

But, at least for now, Grayscale’s discount represents less of a deal than a gamble on litigation and policymaking. Investors may win, after all, but it’s not a slam dunk.

Write to Joe Light at joe.light@barrons.com

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