Hedge funds capitalise on Grayscale Bitcoin ETF approval: Report

These hedge funds strategically acquired GBTC shares between 2021 and 2023, anticipating a surge in its price following regulatory approval from the Securities and Exchange Commission (SEC) for the spot bitcoin ETF.

Grayscale had been attempting to convert its trust into an ETF since 2016 and took legal action against the SEC in 2022 after the regulator rejected its application. The conversion of Grayscale Bitcoin Trust into an ETF was finalised on January 11 after the SEC granted approval for US-listed ETFs tracking bitcoin.

While awaiting regulatory clearance, Grayscale’s trust traded at a significant discount to its underlying assets, reaching nearly 50 per cent in December 2022. Approximately 20 hedge funds engaged in this trade, taking advantage of the potential gains associated with ETF approval. After a court ruled in favor of Grayscale in August 2023, narrowing the price gap, these hedge funds began exiting their positions.

Fir Tree Partners, a hedge fund with $3 billion in assets under management, identified an opportunity in late 2022, investing $60 million in GBTC when it traded at a 42 per cent discount to its assets. The fund initiated its exit in September 2023 and completed the sale in January following the regulatory green light.

Another hedge fund, Hunting Hill, also participated in the GBTC trade, investing when the discount was 42 per cent and liquidating its position as it narrowed to 7 per cent last year. A US-based macro hedge fund founder described this as “the trade of a century” after a court ruling criticised the SEC’s rejection of Grayscale’s application.

However, not all funds are reinvesting in the bitcoin space, as many are contributing to outflows in GBTC after its conversion into an ETF. Total outflows amount to $4.77 billion since the ETF’s launch earlier this month, reducing its assets to $20.4 billion. Hedge funds that engaged in the price arbitrage consider it a successful and opportunistic trade.

Christopher Brown, founder of Aristides Capital, a multi-strategy hedge fund, characterised the trade as “very good” for the fund. Aristides Capital, which invested approximately $20 million in GBTC at an average 30 per cent discount, plans to fully exit in the coming months, expressing limited enthusiasm for bitcoin investments.