Grayscale comes to ETFS

Grayscale gets into thematic ETFs

Grayscale, the company most famous for its $24b closed ended bitcoin fund, the Grayscale Bitcoin Trust, is launching its first ETF.

The Grayscale Future of Finance ETF (GFOF) tracks the Bloomberg Grayscale Future of Finance Index. The index is made up of global companies that have significant business lines in crypto.

Crypto companies are identified using keyword searches on their public documents. Prospective companies then have their revenue checked, to see if enough of it does in fact come from the crypto world.

The result is a 22 stock portfolio that is dominated by bitcoin miners and discount brokers.

The fund charges 0.70%. It’s top holdings are below.

Bernie’s commentary – Grayscale’s pivot; gold miners; CEF discounts

There’s several points to make here, about grayscale, CEF discounts, sales strategies, and gold miners. In no particular order:

1. Grayscale’s bitcoin trust traded on a big premium once upon a time. But once physically backed crypto ETFs got going in Canada and Europe, that premium became a discount. The market preferred the ETF structure.
2. Discounts are bad news for closed ended funds (CEF). This is because they mean brokers are less likely to want to help them raise money. When a CEF is on a premium, brokers have a free arbitrage trade. They raise the capital with which they create units in the CEF at fair value. And then sell the CEFs at a premium. But this free lunch disappears for CEFs on long lasting discounts.
3. Greyscale has said that it wants to turn its bitcoin CEF into an ETF if the SEC ever allows it. This would be great for existing unit holders as it would get rid of the discount. However such a signal also helps ensure that there will never be a premium on the CEF again. Investors won’t buy into a CEF on a premium if they know it will disappear thanks to a change in structure. This then reinforces the point above.
4. I presume the sales strategy for this new ETF – which isn’t distinct from VanEck’s DAPP – is for Grayscale to cross-sell into its existing network. And I presume that network is quite large given it has $24B in its bitcoin CEF.
5. Gold miners traded on generous multiples once upon a time. Investors wanting to buy gold had no better alternative than buying gold miners’ shares. Meaning that gold miners until the 2000s performed very well. But once physical gold ETFs became available, gold miners started to underperform radically. Investors preferred to buy gold directly. I wonder if the same will prove true for bitcoin miners.