What Happens to GBTC Discount When FTX Sells its Holdings?

Bankrupt crypto exchange FTX owns around $417 million of Grayscale’s Bitcoin Trust (GBTC), according to a court filing, and analysts are speculating over what this means for the price of the fund when the estate winds down those holdings.

Current FTX management has said its intention is to return funds to creditors in fiat currency rather than crypto, but plans to trade the assets – which also include sizable holdings of SOL ($1.6B) bitcoin ($560M) and ether ($192M) —– carefully to avoid flooding the market and crashing prices. Along those lines, the company in August hired Galaxy Digital for assistance in executing those sales.

Though GBTC wasn’t explicitly mentioned in those plans, the news is ostensibly good for those hoping the fund’s discount to net asset value (NAV) won’t be negatively affected by an FTX fire sale.

GBTC is the world’s largest crypto fund and – following the recent rally in bitcoin – has more than $21 billion in assets (all bitcoin) under management. After trading at a discount to NAV that widened to as much as 50% last year, the GBTC discount has narrowed to roughly 15% of late amid a return of bull spirits to bitcoin and optimism Grayscale might soon win U.S. Securities and Exchange Commission (SEC) approval to convert the fund to a spot ETF. Much of that optimism can be traced to Grayscale’s mid-August major court victory where it was ruled the SEC was “arbitrary and capricious” in denying the ETF conversion.

A wrench, however, may have been thrown in by a lawsuit last week filed by the State of New York against Grayscale’s parent company Digital Currency Group which had some analysts speculating the SEC may have been given a reason to once again deny the conversion. Digital Currency Group is also the parent company of CoinDesk.

FTX crypto sales and GBTC

According to Scott Jonhsson, a general partner at Van Buren Capital, a plan of reorganization for the FTX bankruptcy isn’t likely to be confirmed before the second quarter of 2024 and speculators are expecting a decision from the SEC over spot bitcoin ETFs before that.

“In that case, we should have a pretty clear view at that point if spot BTC ETFs (including GBTC) are approved and trading,” said Johnsson.

Johnsson explained that if GBTC has converted to an ETF by that point, any sales of GBTC from the FTX estate should have a similar effect as if FTX was selling spot BTC. “The selling wouldn’t create or widen any discount to GBTC since the creation and redemption process for the ETF should just track the underlying BTC price,” said Johnsson.

However, there is a chance that the SEC rejects Grayscale’s application on the basis of an alternate reason and Johnsson explains that this might be negative for the discount. “If GBTC has not converted at that point, then you would expect FTX estate sales to put pressure on the discount and perhaps cause it to widen.”

Sean Farrell, head of crypto strategy at Fundstrat, echoes Johnsson’s thoughts. “The SEC’s approval of a spot ETF would undeniably aid in ensuring creditors are made whole. We’d witness a more pronounced narrowing of the discount to NAV in GBTC, and it’s probable that crypto asset prices would surge overall, given the positive catalyst.”

He goes on to say that if the SEC does not approve the ETFs the discount will likely widen. “But at this point we see a very low probability that the spot ETF does not get approved,” added Farrell.