In a new analysis, JPMorgan has raised concerns about potential fund outflows following the possible conversion of Grayscale Bitcoin Trust (GBTC) into an ETF. The banking giant estimates that the conversion could prompt investors to withdraw at least $2.7 billion.
The Grayscale Bitcoin Trust, a crucial force in the previous bull market, has seen its discount to Bitcoin’s current market price shrink from -46% at the start of the year to -9.77% on November 22, the lowest level since mid-August 2021. This discount reduction is particularly important because it indicates that investors expect the U.S. Securities and Exchange Commission (SEC) to approve Grayscale’s conversion to a spot Bitcoin ETF. However, JP Morgan has done so warned that this switch could lead to some instability in the market.
$2.7 Billion Exodus After Bitcoin ETF Approval?
JPMorgan analysts including Nikolaos Panigirtzoglou have been scrutinizing inflows into GBTC since early 2023, revealing a calculated strategy by traders to exploit the discount for gains on ETF conversion. The bank’s methodology took into account cumulative signed dollar volume, taking into account both the volume of shares traded and the direction of price movement.
The analysts say these inflows, driven mainly by speculation about GBTC’s conversion to an ETF, are likely to reverse as investors look to take advantage of the arbitrage opportunity presented by the narrowing of the discount to net asset value. The minimum expected outflow, after conversion to an ETF, is $2.7 billion.
However, this could escalate if GBTC’s current fee structure of 200 basis points is not significantly reduced post-conversion. The competitive landscape, as suggested by the ARK 21Shares Bitcoin ETF’s 80 basis point fee, makes such a reduction necessary for GBTC to maintain its market dominance.
The impact on the market can be significant. A complete pullback of the $2.7 billion could put significant downward pressure on Bitcoin prices. However, JPMorgan analysts believe that much of this capital will likely be allocated to other Bitcoin-related instruments, limiting any drastic market disruptions.
They predict a reconfiguration of assets, from $23 billion in GBTC and $5 billion in other funds to $20 billion in the trust and $8 billion in other funds. Nevertheless, they warn that some of the funds will leave the Bitcoin space completely, which would pose a risk of a decline in Bitcoin prices.
Notably, JP Morgan analysts led by Panigirtzoglou predicted in early September that the SEC will be forced to approve spot Bitcoin ETFs after losing the case against Grayscale. Furthermore, JP Morgan’s forecast is based on the assumption that the adoption of a series of ETFs will create more intense competition among Bitcoin investment products, likely resulting in a fee structure more closely aligned with that of Gold ETFs, typically around 50 basis points .
While the market awaits the SEC’s decision, the main concern remains: whether the expected GBTC outflows will find a new home within the Bitcoin space or whether they will signal a broader withdrawal from BTC investing.
At the time of writing, BTC was trading at $37,560.
Featured image from Veri-Media, chart from TradingView.com