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GBTC discount narrows following arguments in Grayscale-SEC lawsuit

On Tuesday, shares of Grayscale's Bitcoin Trust (GBTC) rose as much as 16% following an oral argument hearing in the company's lawsuit against the SEC.

As of Monday, shares of Grayscale's Bitcoin Trust traded at a 42% discount to the value of bitcoin held by the Trust, according to data from Yahoo Finance and YCharts. Bitcoin (BTC-USD) falling 1% against GBTC's rally on Tuesday shows this discount narrowed during Tuesday's hearing.

With no ruling for Grayscale's case expected for at least several months the asset manager maintains winning its lawsuit against the SEC is its best path for pulling many of its shareholders back to breakeven.

Such a win could also open the gate for spot bitcoin ETFs to be bought by U.S. retail investors.

Before the U.S. Court of Appeals for the Washington D.C. Circuit on Tuesday, Grayscale delivered oral arguments for its case, calling the SEC's decision to not approve its ETF application the "definition of arbitrary decision making."

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Don Verrilli, a former U.S. Solicitor General hired by Grayscale for the lawsuit, noted that on the grounds the bitcoin futures and bitcoin spot markets are fundamentally "like" products, the SEC under current Chair Gary Gensler has been inconsistent in its decision-making.

Citing a "99.9% correlation" between the bitcoin futures and bitcoin spot markets, Verilli said the products are the same.

"The key empirical question is whether fraud and manipulation in the [bitcoin] spot market impacts CME [bitcoin] futures in the same way," Emily True Parise, an attorney for the SEC, told the hearing's panel of three judges. "And ... we don't have conclusive data."

While questioning Parise, Judge Sri Srinivasan suggested no matter where manipulation occurs, "like the night follows the day," both markets would be impacted.

If Grayscale were to be granted approval, federal Judge Neomi Rao asked whether the SEC would, "approve a spot product, or would it go back on its approval of the futures product?" The SEC's attorney said she could not speak to what the Commission would decide.

"But certainly, if you disagree with the Commission's position here... the commission would have to think about the issues anew," the attorney added.

Along with Grayscale, more than a dozen other asset managers have sought bitcoin ETF approval to no avail since 2020 including VanEck, WisdomTree, Fidelity, and ARK Invest.

Representation of Bitcoin cryptocurrency is seen in this illustration, on February 26, 2023 in Brussels, Belgium. (Photo by Jonathan Raa/NurPhoto via Getty Images)
Representation of Bitcoin cryptocurrency is seen in this illustration, on February 26, 2023 in Brussels, Belgium. (Photo by Jonathan Raa/NurPhoto via Getty Images) (NurPhoto via Getty Images)

However, for many shareholders of the $14 billion Grayscale bitcoin trust, the stakes are also about getting back losses that have emerged from the perpetual discount to NAV, or net asset value. Because GBTC is a closed-end fund, the trust cannot simultaneously create and redeem shares legally without regulatory approval.

If the trust converts to an ETF the discount will immediately disappear, creating an estimated $5.8 billion in value for shareholders.

Grayscale, as well as trust shareholders critical of its sponsorship of the trust, have pointed out there is another way to reduce the discount. The trust can seek approval to only allow redemptions through a Regulation M application. Grayscale has maintained a position that seeking Regulation M approval without first trying to win its lawsuit against the SEC is the best course.

Many shareholders disagree on the asset manager's direction. As recently as Monday, the FTX bankruptcy estate filed a legal complaint against Grayscale for its management of its bitcoin and ethereum trusts.

According to FTX, if Grayscale reduced its sponsor fee from 2% and stopped preventing redemptions, the two trusts would "unlock a combined $9 billion or more for shareholders and a quarter of a billion dollars" for the bankrupt company.

A Bloomberg Intelligence research note from February gave Grayscale a 40% chance of winning the case. The case is Grayscale v. SEC case (22-1142).

David Hollerith is a reporter for Yahoo Finance. Follow him on Twitter @DSHollers

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