Six Questions and Six Answers: What does it mean for GBTC to be converted into a spot ETF?

At Grayscale , we believe it is a question of “ when ” rather than “ if ” that U.S. regulators approve a spot Bitcoin ETF.

We remain focused on listing GBTC as a spot Bitcoin ETF on NYSE Arca . While timelines are inherently fluid, looking ahead, we sat down with Grayscale’s Chief Legal Officer Craig Salm and Chief Financial Officer Edward McGee to answer some common questions from investors and other market participants about the process and impact of listing products like GBTC on a stock exchange, including the process for GBTC to be listed on NYSE Arca and what GBTC trading as an ETF means for investors.

Q: First, can you give us an overview of how ETFs generally work?

A: An ETF is an investment product whose shares are traded on a national securities exchange, such as NYSE Arca, Nasdaq, or CBOE. ETFs are capable of both share creation and redemption, and are designed to keep the ETF's shares trading at the value of its underlying assets or holdings (often referred to as the net asset value, or NAV).

Market participants called Authorized Participants (APs) (primarily broker-dealers such as banks or trading firms that hold certain registrations) are incentivized to create ETF shares when their stock trades above the ETF's net asset value, or to redeem ETF shares when their stock trades below the ETF's net asset value.

APs are typically the only market participants that can engage in such transactions with ETFs. These creation and redemption transactions give APs the opportunity to earn profits through this arbitrage mechanism, which is an incentive to ensure that the ETF tracks the value of its underlying assets. ETFs that closely track their NAVs can also incentivize brokers and investors who are not APs to buy and sell shares in the open market without creating or redeeming shares. The more liquid the ETF shares are, or the higher the free access and trading volume, the less reliance there is on creation and redemption transactions.

Q: How does GBTC work today?

A: GBTC is an investment trust that owns more than 3% of all Bitcoin currently in circulation. As of November 29, 2023, each GBTC share is backed by 0.0008968 BTC. GBTC does not own anything other than Bitcoin, nor does GBTC use leverage or use derivatives such as Bitcoin futures contracts, and the underlying Bitcoin tokens are held in secure offline storage. Grayscale is responsible for overseeing the day-to-day management of GBTC, including managing custodial relationships, communications with regulators, tax reporting, financial statements, and other requirements for publicly traded investment vehicles.

GBTC shares have historically been issued through a private placement process that was not subject to registration under the Securities Act of 1933, so such shares were initially only available to accredited investors and were subject to a holding period under Rule 144, and GBTC shares were not redeemable. To provide liquidity, GBTC was publicly quoted on the OTCQX market in mid-2015. Since then, any investor with access to the public market can buy and sell freely tradable GBTC shares, enabling them to add exposure to Bitcoin to their investment accounts.

However, due to Rule 144 , newly created shares must undergo a holding period, and if GBTC shares trade on OTCQX at a price higher than GBTC’s NAV, AP cannot create more shares to immediately add them to the market and re-adjust the price to GBTC’s NAV. Conversely, since GBTC also does not offer a redemption program, if GBTC shares trade at a price lower than GBTC’s NAV, AP cannot redeem shares to remove them from the market and re-adjust the price to GBTC’s NAV. Therefore, GBTC cannot rely on the arbitrage mechanism inherent to ETFs described earlier. GBTC shares can and have traded at premiums and discounts to NAV.

The innovation of the ETF product structure lies in its arbitrage mechanism, which can continuously add or redeem shares to resolve premiums and discounts.

Importantly, in an ETF model, GBTC shares are expected to track the price of Bitcoin more closely, meaning that any premium or discount on GBTC shares is expected to disappear. As of November 29, 2023, GBTC's AUM was $23.4 billion and it was trading at a discount of 8.09%, or $1.89 billion. This means that, assuming the current discount disappears, GBTC will unlock approximately $1.89 billion in value for investors through the arbitrage mechanism after it is listed on NYSE Arca and becomes an ETF.

Q: What will happen to GBTC if the SEC gives the proper regulatory approval to allow a spot Bitcoin ETF to enter the U.S. market?

A: The creation of GBTC shares will be registered with the SEC through a registration statement on Form S-3 under the Securities Act of 1933. Redemptions of GBTC shares are expected to be conducted pursuant to the Regulation M exemption previously granted by the SEC for products with similar characteristics. This will provide the necessary approvals for simultaneous creation and redemption of GBTC to provide arbitrage opportunities when there is any premium or discount between the GBTC share price and the GBTC net asset value, thereby enabling GBTC to more closely track the value of its underlying asset, Bitcoin. GBTC will also be upgraded from OTCQX to NYSE Arca once the SEC approves NYSE Arca's Rule 19b-4 application.

GBTC is ready to operate as an ETF. Grayscale will work with our partners to list GBTC on NYSE Arca immediately upon obtaining the appropriate regulatory approvals.

Q: If the SEC approves a spot Bitcoin ETF and allows GBTC to be listed on NYSE Arca, what must GBTC investors do?

A: GBTC investors do not have to take any action. When investors view their GBTC shares after listing on NYSE Arca, they will only see that the shares are listed on NYSE Arca, not quoted on OTCQX. GBTC will retain the same ticker symbol (GBTC) and the same CUSIP, and investors will continue to be able to buy and sell GBTC shares at the open market price.

Q: What tax implications should I be aware of when GBTC upgrades to NYSE Arca?

A: No. The listing of GBTC on NYSE Arca will not constitute a taxable event.

Q: Is there a timetable for when GBTC will be approved for listing on NYSE Arca?

A: Unfortunately, no. Although the D.C. Circuit ruled in favor of Grayscale in its August 2023 action against the SEC , reversing the SEC’s decision to deny NYSE’s 19b-4 application to list GBTC on NYSE Arca . This is an unprecedented situation and the timeline is inherently uncertain. The Grayscale team is committed to working constructively with the SEC to list GBTC on NYSE Arca and will continue to share updates as more information becomes available.