Several hedge funds made strategic investments in the Grayscale Bitcoin Trust (GBTC) between 2021 and 2023, anticipating that its value would surge upon the approval of a spot Bitcoin exchange-traded fund (ETF) by the Securities and Exchange Commission (SEC).
Grayscale had been striving to transition its trust into an ETF since 2016, but their efforts faced setbacks, including a lawsuit against the SEC in 2022 when the regulator rejected their application.
However, on January 11, 2024, Grayscale successfully converted its trust into an ETF, following the SEC’s approval of U.S.-listed ETFs tracking Bitcoin.
Before regulatory approval, GBTC was trading at a substantial discount to its underlying assets, nearly 50% in December 2022, according to data from YCharts.
The collapse of the crypto exchange FTX exacerbated this discount. Recognizing the potential gains that ETF approval could bring, approximately 20 hedge funds, both small and large, embarked on this strategic trade.
One hedge fund, Fir Tree Partners, with $3 billion in assets under management, spotted the opportunity in the last quarter of 2022 when GBTC was trading at a 42% discount.
They capitalized on the price disparity, resulting in a $60 million profit. The firm began exiting its position in September 2023, following the court’s decision, and fully divested after the ETF’s regulatory approval.
Another hedge fund, Hunting Hill, invested in GBTC during the same discount period and exited when the discount narrowed to 7% in the previous year.
The founder of a U.S.-based macro hedge fund shared that his conviction in GBTC’s approval grew stronger after a court ruling in August 2023 deemed the SEC’s rejection of Grayscale’s application as incorrect, describing it as “the trade of a century.”
Nevertheless, not all the proceeds from the GBTC trade are flowing back into the Bitcoin space.
Many hedge funds are among the investors responsible for substantial outflows from GBTC following its conversion into an ETF.
These outflows have totaled $4.77 billion since the ETF’s launch earlier this month, reducing its assets to $20.4 billion.
For many portfolio managers, the price arbitrage opportunity presented by GBTC was viewed as opportunistic rather than a long-term commitment to Bitcoin.
Christopher Brown, founder of the multi-strategy hedge fund Aristides Capital, invested around $20 million in GBTC at an average discount of 30% to its assets.
Although the trade was lucrative, he plans to fully exit in the coming months, expressing limited enthusiasm for investing in the spot Bitcoin ETF, stating, “We’re not inherently super excited about Bitcoin.”