GBTC Shares Jump on Judges' SEC Skepticism

Shares of the Grayscale Bitcoin Trust (GBTC) surged Tuesday after federal judges in the United States appeared to side with parent company Grayscale in its lawsuit against the Securities and Exchange Commission.

At the close of market Tuesday, shares were trading at $12.90, an increase of almost 10% from the previous day. Meanwhile, the price of Bitcoin fell slightly, meaning the gap between the value of GBTC and the underlying bitcoin narrowed. Last week, that discount was 46%, according to data from YCharts. Tuesday evening, it was 36%.

GBTC is the world’s largest publicly traded crypto fund, with almost $14B in assets under management. With the debut of GBTC several years ago, institutional investors finally had a way to gain exposure to the original cryptocurrency. Investors could exchange Bitcoin for shares in the trust, and trade those shares on the stock market.

From 2015 to 2020, shares were consistently worth more than the Bitcoin they represented. On occasion, the premium topped 130%. Since March 2021, however, GBTC has traded at a discount as competing products emerged and GBTC lost its stranglehold over the market.

Last year, the SEC denied Grayscale’s bid to convert the trust to an exchange-traded fund (ETF), a move that would have allowed investors to redeem their shares for the underlying Bitcoin and, in turn, allow GBTC to trade more in tandem with its underlying assets.

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The Defiant

Grayscale promptly sued. On Tuesday, Don Verrilli, Grayscale lawyer and a former Solicitor General in the Obama administration, argued the SEC’s denial of the ETF conversion was “the definition of arbitrary decision-making.”

The SEC had rejected Grayscale’s application arguing it doesn’t offer sufficient protection against manipulation of the spot Bitcoin market. Just a couple months earlier, however, the commission had approved a Bitcoin futures ETF that used the same risk management system.

“The fundamental problem with the order is that it contradicts previous SEC orders giving the green light to Bitcoin futures [exchange traded products] that pose the same risk of fraud and manipulation,” he said.

But Grayscale had yet to prove that futures and spot Bitcoin ETFs do indeed share the same risk for manipulation, SEC attorney Emily Parise argued.

Skeptical Judges

The three-judge panel overseeing the case seemed skeptical of the government’s argument.

“What kind of data would they have to show?” Judge Naomi Rao asked Parise. “You can say that they bear the burden, but seems SEC has to explain why they are wrong in the evidence they have offered.”

An outcome isn’t expected for several months, according to James Seyffart, a research analyst at Bloomberg Intelligence.

“But that went better for Grayscale than I think most people predicted,” he wrote on Twitter. “Based on what i just listened to, I wouldn’t be surprised if Grayscale won over all three of the judges here.”

Even if Grayscale were to succeed in court, its decision would be sent back to the SEC which could, in theory, find another reason to deny it, Verrillii acknowledged.

“It would surprise me a great deal if they decided to rethink the whole thing, but I don’t see anything that forecloses them from doing so,” he said.