Some hedge funds made a fortune by investing in the Grayscale Bitcoin Trust (GBTC) before it became an exchange-traded fund (ETF) tracking Bitcoin. According to Reuters, hedge funds bought shares in GBTC between 2021 and 2023, expecting its price to soar once the Securities and Exchange Commission (SEC) approves the spot bitcoin ETF.
Grayscale, trying to convert its trust into an ETF since 2016, sued the SEC in 2022 after the regulator rejected its application. Grayscale won the lawsuit in August 2023, and the SEC finally gave the green light to U.S.-listed ETFs tracking bitcoin in January 2024.
Before the approval, GBTC was trading at a huge discount on its underlying assets, reaching almost 50% in December 2022, according to data platform YCharts. The discount was partly due to the collapse of the crypto exchange FTX, which affected the liquidity and demand for GBTC. Hedge funds saw this as an opportunity to profit from the price gap, which they expected to close once the ETF approval was granted.
Hedge Funds’ Strategic ETF Moves
According to Reuters, about 20 hedge funds, ranging from small to large, executed this trade. One of the hedge funds that participated in the trade was Fir Tree Partners, which had $3 billion in assets under management. A person familiar with the matter said that Fir Tree invested $60 million in GBTC in the last quarter of 2022 when it was trading at a 42% discount on its assets.
The source said that Fir Tree began to exit the position in 2023 after the court ruling in favor of Grayscale. According to the source, the firm sold its entire stake in January 2024 following the ETF conversion. Another hedge fund that profited from the trade was Hunting Hill, which bought GBTC when it was trading at a 42% discount and sold it when it narrowed to 7% last year, a source familiar with the matter said.
The founder of a U.S.-based macro hedge fund, who also did the trade, told Reuters that he was confident that the ETF approval would happen after the court decision in August 2023. He called it “the trade of a century.” However, not all the money that went into GBTC stayed in the Bitcoin space. Many hedge funds were among the investors who withdrew their money from GBTC after it became an ETF.
Related Reading | Bitcoin Holds Steady Amidst S&P 500 Highs: Analysts Skeptical of $40,000 Rebound