Bitcoin’s fortunes may have tumbled this year but its advocates are not backing down yet.

Investment firm Grayscale is pulling out all stops in its bid to get approval for conversion of its Grayscale Bitcoin Trust (GBTC) – a closed-end fund for accredited investors – to an ETF. The company submitted its application to the SEC in October last year and a decision is expected by July 6. The agency approved three Bitcoin ETFs based on bitcoin futures last year but is still to give the green light to an ETF based on spot prices.

While the SEC deliberates, Grayscale has launched an advertising blitz asking crypto investors and enthusiasts to “advocate for a Bitcoin ETF”. It has put up a billboard outside Washington D.C.’s Union Square station and plans to run ads in prominent publications, including the New York Times and Washington Post. A page on its website also asks users to send comments to the agency. According to some accounts, Grayscale may also file a lawsuit against the SEC if its application is rejected.

Why is GBTC Keen on An ETF?

Launched in 2013, GBTC is one of the earliest investment products for crypto exposure to mainstream investors. According to the latest data, it has $18.7 billion worth of assets under management. Holding a single GBTC share equals ownership of 0.00092399 Bitcoin.

Like most closed-end funds, GBTC shares trade at a significant premium or discount to the actual price of Bitcoin. For example, it is currently trading at a discount of 31.33% to the actual Bitcoin price. During spikes of volatility, when Bitcoin’s price often jumps by double-digits in a single day, GBTC shares have traded at a premium to the cryptocurrency’s price.

In recent times, GBTC shares have traded at a discount more than at a premium. Thus, even when the price of Bitcoin is on an upswing – as happened in October last year – the fund’s shares traded at a discount to the cryptocurrency’s price.

A discount during such times is bad news for its investors because it means they are losing money by not getting the true value of the underlying security – in this case, the price of a single bitcoin. Converting from a closed end fund to an ETF (and, thereby, increasing share count) is one way that the company can reduce the discount associated with GBTC’s price.

Will the SEC Approve?

An ETF based on spot prices is the holy grail for many Bitcoin purists because it would be based on the actual price of Bitcoin rather than a derivative. But the cryptocurrency’s journey towards an ETF based on spot prices remains an uphill climb.

Its ecosystem is still home to many problems outlined by the SEC in a January 2018 letter that explained its reasoning behind rejection of Bitcoin ETFs. These problems range from price volatility to lack of transparency to illiquid markets.  

Bitcoin prices have been in a tailspin, along with mainstream markets, in the current macroeconomic environment. Except the effect of economic turbulence is exaggerated in the price action for crypto markets. For example, bitcoin itself fell by 20 percent in five days at the beginning of May. Even CME’s Bitcoin futures, which are supposed to provide a sort of cushion from the spot price to investors, fell by roughly 19% during the same time period.

There’s also the question of transparency. The risk of manipulation and fraud in cryptocurrency markets remains as high as it was in 2018. A report in the Wall Street Journal last week catalogued instances of anonymous crypto wallets amassing large stakes in coins that were about to go public. Crypto equivalents of a bank run are still rife, as was evidenced in the collapse of Terra’s stablecoin UST.

Even the workings for GBTC’s price action remain a mystery. During a conversation with Coindesk this morning, Grayscale CEO Michael Sonnenshein provided a far from satisfactory explanation for the significant discount for its share price relative to Bitcoin’s valuation at crypto exchanges, attributing the price difference to ‘market forces’.

SEC Chief Gary Gensler has repeatedly cited investor protection as his guiding principle for more regulation of crypto markets. It is unlikely that his agency will back down from its stance to accommodate GBTC’s application.