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The GBTC (Grayscale Bitcoin) ETF is known for historically having a premium to net asset value (NAV). This led crypto funds to buy bitcoin, deposit their bitcoin into the trust to obtain GBTC, then sell GBTC for a profit.

Recently, this premium turned into a discount, because as a grantor trust, it cannot sell its bitcoin holdings. The crypto funds, seeking liquidity, are then forced to sell their GBTC holdings at a discount.

But my question regards why the premium existed in the first place. The arbitrage opportunity when there was a premium suggests that Grayscale was leaving money on the table. What kept Grayscale from buying more bitcoin themselves and selling more GBTC to take advantage of this premium? Is there something about the grantor trust ETF structure that prevented them from doing this?

More generally, what is the relation between ETF structure and premium/discount to NAV?

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Based on a cursory reading of their prospectus filed with the SEC, it seems that only selected entities can create and redeem shares, they call these entities "Authorized Participants". Only two such participants were listed, together with creation and redemption rules:

Baskets may be created or redeemed only by Authorized Participants. Each Authorized Participant must (i) be a registered broker-dealer, (ii) have entered into a Participant Agreement with the Sponsor and (iii) have access to an Authorized Participant Self-Administered Account (as defined herein) in the case of the creation or redemption of Baskets that do not use the Conversion Procedures. The Participant Agreement provides the procedures for the creation and redemption of Baskets. See “Description of Creation and Redemption of Shares.”

The Trust is currently in discussions with KCG Americas LLC and Wedbush Securities to serve as Authorized Participants for the Trust. Additional Authorized Participants may be added at any time, subject to the discretion of the Sponsor.

Therefore I believe the reason that premium existed for a long period of time was the difficulty for prospective arbitrage traders to actually create shares using Bitcoin, as the two Authorized Participants may not be willing or incentivized enough to make that process easy. On top of that, the SEC regulation in the crypto space has been very ambiguous, causing the two firms to avoid getting tangled in any type of transaction with significant liability.

The above should also answer the 2nd part of the question regarding why Grayscale doesn't do it themselves, because they specifically provided against that in the prospectus. This avoided the perceived and actual self dealing, and make the fund itself more appealing to investors.

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