What motivated Grayscale to sue the SEC?

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Over the last few years, dozens of well-known institutions, including SkyBridge Capital, Bitwise, One River, Ark, 21Shares, VanEck, and others, have had their applications for spot bitcoin ETFs rejected.

Grayscale has not only gained significant management fee income with its series of "cryptocurrency one-way ETFs" over the last two years, thanks to the Federal Reserve's large-scale pump priming, but has also directly fueled the crypto bull market.

According to the data, the total value of GBTC held by Grayscale investors has reached $12.97 billion, but it has dropped by 47.19 percent in the last year. Three Arrows Capital, BlockFi, and ARK are the top three holding institutions, with the value held by Three Arrows Capital and BlockFi reaching $1.46 billion and $747 million, respectively, in a period of time in 2021, and the highest premium rate of GBTC at that time reaching 20%.

Grayscale has suspended the redemption value of GBTC since October 28, 2014, resulting in GBTC becoming a "Bitcoin one-way ETF." Furthermore, after being listed in the primary market, GBTC must go through a 6-month lock-in period before being traded in the secondary market.

Under the macroeconomic backdrop of the United States' pump priming, GBTC has had a positive premium for a long time, leaving many institutions with room for arbitrage.

However, as the Federal Reserve began to gradually tighten monetary policy, GBTC began to have a negative premium, and the arbitrage space was gradually compressed until it became negative, resulting in the restriction of Grayscale's related products. This prompted many institutional investors to shift their funds to other BTC-related investment products, as well as criticism of GBTC's irredeemable mechanism.

At the same time, many Canadian institutions launched Bitcoin ETF products in 2021, including The Bitcoin Fund, 3iQ CoinShares Bitcoin ETF, and others. As more funds were invested in these products, Grayscale's GBTC's market share shrank. The holding volume of the Bitcoin ETF in the Canadian market alone increased by 31% in January of this year.

If the SEC approves Grayscale's application to convert GBTC into a spot Bitcoin ETF, the product will be able to track the Bitcoin price and eliminate its current negative premium of more than 35%, and investors will be able to freely redeem BTC. Grayscale and its customers will undoubtedly benefit from this arrangement.