The launch of a Bitcoin futures exchange-traded fund is being hailed as a historic moment for the cryptocurrency. It’s also putting pressure on the

Grayscale Bitcoin Trust

—the largest Bitcoin fund on the market—to try and convert to an ETF.

But investors shouldn’t hold their breath. The ETF getting a green light from the Securities and Exchange Commission, the ProShares Bitcoin Strategy ETF (ticker: BITO), holds Bitcoin through futures contracts. The Grayscale Bitcoin Trust (GBTC) owns the coin directly.

A spokesman for Grayscale declined to comment, referring Barron’s to the company’s public statements.

Under Chairman Gary Gensler, the SEC has shown no sign it’s willing to approve an ETF with direct ownership of Bitcoin. While a slew of futures-based ETFs appear likely—late Monday, though, Invesco pulled its application—a direct

Bitcoin ETF

remains a tall hurdle for regulators to approve.

That isn’t stopping Grayscale from planning an ETF. “We are 100% committed to converting $GBTC—and our product family—into ETFs, when the SEC has ‘formally’ expressed their requisite comfort with the underlying Bitcoin market,” Grayscale’s director of communications, Jennifer Rosenthal, tweeted on Monday.

The trust has amassed $33 billion in assets. Some of the biggest names in tech, including ARK Invest CEO Cathie Wood and BlockFi Lending CEO Zac Prince, own shares through their companies, according to regulatory filings. The value fund manager Bill Miller is also a shareholder through his Miller Value Partners firm.

Turning the trust into an ETF would be a win for its investors, for a few reasons. GBTC’s expense ratio is steep with an annual management fee of 2%, compared with roughly 1% from the new ProShares ETF. Grayscale probably would have to lower the fee to be competitive with Bitcoin futures ETFs, especially since several more are expected to launch over the next few months.

Moreover, the trust trades at a deep discount to its underlying net asset value or NAV. Trading like a stock, over the counter, GBTC has a fixed number of shares that fluctuate above or below the value of its underlying Bitcoin holdings. The discount was recently 14.6%, implying that investors could buy $1 of Bitcoin for about 85 cents on the dollar.

Even if Grayscale gets the SEC’s nod for an ETF, it would still have financial incentives to maintain a closed-end structure. Its management fees would come down for an ETF and Grayscale would be able to charge fees only on the ETF’s NAV. Grayscale now earns fees on the NAV, too, but that’s nearly 15% higher than the share price.

If GBTC were allowed to convert, the discount to the NAV probably would evaporate because of the creation/redemption process that keeps an ETF’s share price largely aligned with its NAV, said Dave Nadig, chief investment officer and director of research of ETF Trends.

Yet Nadig points out that the SEC, under Gensler, has taken a path of least resistance in approving a Bitcoin futures ETF, rather than a fund with direct ownership in the coin. “It’s the least they could do other than banning crypto,” he said.

Approving an ETF with direct ownership poses “surveillance problems” for the SEC, he said. Tracking counterparty risk, market manipulation, and fund flows is much harder in the spot market than on regulated futures exchanges.

“The SEC has arrangements with exchanges for access to data,” Nadig said. “That’s difficult with Bitcoin, where someone can take a hard wallet from Singapore, fly over to Russia and make a transaction. That’s challenging for the SEC to get its hands around.”

Grayscale also isn’t likely to bend to activist shareholder pressure to lower its fees or buy back shares close to the NAV. Activists often mount proxy campaigns to try to pressure a closed-end fund to buy back shares in a tender offer close to the NAV, moves that can pay for investors.

But the trust isn’t a registered investment company under the Investment Company Act of 1940—a sweeping set of rules that governs ETFs, closed-end funds and open-end mutual funds, giving shareholders significant proxy voting rights. Rather, GBTC trades as an over-the-counter security, abiding by a skinnier set of exchange rules and shareholder voting rights.

“Over-the-counter is a third-tier market for a reason,” said Nadig. “It’s where you have less investor protection and it’s a caveat-emptor market.”

Moreover, Grayscale Investments, the trust’s sponsor, passed bylaws in 2017 that eliminated the ability of external shareholders to remove it as the sponsor, according to James Elbaor, an activist investor and managing partner at Marlton LLC, a family office.

“They’ve done a share buyback program and the sponsor could still do a tender,” Elbaor told Barron’s. “We pushed them for a modified Dutch auction tender and we still see that as the best option for Grayscale to pursue.”

Elbaor doesn’t own shares in GBTC anymore, though, having sold his position in August and September after the company rejected his demands. “Their response was we’re 100% committed to converting to an ETF,” he said. “We gave up the fight.”

Investors would have been far better off holding Bitcoin directly. The price of GBTC has gained 275% over the past year versus a 440% return for Bitcoin itself. Over the last three years, GBTC has gained 580% versus 870% for Bitcoin.

Write to Daren Fonda at [email protected]

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