Q9 Weekly | Grayscale’s Anatomy

5 min readSep 1

1 September 2023

· Grayscale wins major court case against SEC

· Its trust (GBTC) could be converted into an ETF

· Markets rally, volumes increase, GBTC discount narrows

After a rather sleepy summer with stubbornly stable prices and historically low volatility, crypto markets have finally awoken as autumn approaches. Major cryptocurrencies came roaring back this week after digital asset manager Grayscale notched a legal victory that could have major ramifications for the industry.

The landmark decision sent trading volumes of its Bitcoin Trust (GBTC) soaring, narrowed its discount to NAV and caused BTC to jump by 6.2% to $27.73k.

What Happened?

A federal appeals court in Washington DC ruled the SEC was wrong to reject Grayscale’s previous application to convert its flagship vehicle, Grayscale Bitcoin Trust, into an ETF, finding the agency acted “capriciously” and “arbitrarily” — that’s what crypto folk have been saying for years!

Source: US Court of Appeals Aug. 29 court filing

The legal victory now potentially opens the door for a spot bitcoin ETF to be listed in the US. Advocates have long argued that allowing this type of product would enable a greater swath of the general public to invest in Bitcoin without having to go through the trouble of buying it directly.

Bitcoin Surges Following Grayscale Court Victory

Source: TradingView

However, while the court ruled in favour of Grayscale, calling the SEC’s reasons for blocking a Bitcoin ETF “unlawful,” the decision still falls on the SEC to approve, deny, or delay on making a decision. While the SEC has previously given the green light to ETFs based on futures, the regulator has argued that spot Bitcoin trades on unregulated exchanges and can be prone to market manipulation.

Grayscale has for years had the biggest US exchange-traded security that owns Bitcoin (Currently holding over $17bn worth). However, GBTC is not currently an ETF — a vehicle that would, undoubtedly, be the more attractive product for investors.

The firm has been trying to convert it into one, but so far the SEC has said no. Grayscale sued and a federal appeals court just ruled the SEC’s rejection was problematic. This kicks the case back to the SEC for review, and while the regulator could still object to the conversion, the judges severely criticized the SEC’s previous rationale.

How the Market Reacted

Digital assets rallied across the board, particularly those linked to Bitcoin. BTC Layer-2, Stacks, was a major beneficiary, rising 9.2% over the week. Bitcoin Cash also rallied by 11.5%. Listed crypto companies such as MicroStrategy and Coinbase also jumped.

The GBTC discount to NAV has since dropped to its lowest level since Dec 2021, hitting 19%. The shares have traded at a discount to Bitcoin’s market value since Feb 2021, reaching lows of nearly 50% in Dec 2022.

GBTC also saw its busiest trading session in 14 months, with nearly 20mn shares changing hands through the day, the most since the June 2022 crypto market crash.

GBTC Discount Narrows

Source: YCharts

Why it’s Important

What happened today is important for two big reasons.

First, ETFs are important because it increases the number of people who can invest in crypto by providing a more traditional and regulated pathway. There’s potentially billions of dollars of capital sitting on the sidelines that would trade BTC if it could be traded through familiar stock exchanges. ETFs are a hugely popular investment vehicle — with more than $10tn under management worldwide.

Global Allocation to ETFs Now at $10 Trillion Across All Asset Classes

Source: Statista

And second, like the Ripple decision in July, the US Court of Appeals has shown that the SEC is not the ultimate arbiter of crypto. The agency does not necessarily or automatically get the final word; the US court system and better yet Congress can also offer legal interpretations. This is significant because of the boom and bluster coming out of SEC Chair Gary Gensler since he took office, and his willingness to say all of crypto — except Bitcoin — is under the agency’s remit.

Market watchers generally indicate that the court’s ruling makes a positive outcome in Wall Street’s spot BTC applications more likely.

It’s certainly fair to say that it’s been a rough couple of months for fiat maximalists. First, every midsized bank on the brink of failure (SVB, CS, etc) had to be saved by governments in order to avoid collapse of the banking system; then heavy hitters like BlackRock, Fidelity, PayPal and others announced they are to heavily invest in blockchain and digital assets.

On top of that, the SEC loses case after case (Ripple, Grayscale, etc) against their holy war on crypto. The crypto industry is now salivating not only over the court’s pro-ETF ruling, but anti-SEC comments.

One could almost feel sorry…