JPMorgan: GBTC may face $2.7 billion outflow after conversion to ETF

JPMorgan analysts at Morgan Stanley have stated that if Grayscale's Bitcoin Trust GBTC is converted into an ETF, it may face at least $2.7 billion in outflows.

GBTC's Current Inflows Are for ETF Cash-Out

Since the beginning of this year, traders have been buying Grayscale's GBTC because its trading price has been at a discount, lower than the potential value of the Bitcoin it holds, possibly in hopes of profiting from the price difference when converting to physical Bitcoin ETF.

This means many GBTC traders may cash out once GBTC is converted to an ETF. Taking this into consideration, analysts at JPMorgan studied the inflows of GBTC since 2023 to calculate the potential stock value to be sold post-conversion, estimating it to be around $2.7 billion.

JPMorgan analysts state that if most purchases are driven by speculation of GBTC converting to an ETF, investors are likely to profit and exit the market once the fund is converted to an ETF. The outflow of funds is because investors apparently bought GBTC at a significant discount in anticipation of ETF conversion and intend to profit from arbitrage opportunities as theoretically, there should not be any discount or premium space for the ETF post-conversion.

Currently, GBTC is trading at a discount of 9.77%, the first time since July 2021.

$2.7 Billion Outflow is Just the Minimum

The $2.7 billion figure is the minimum outflow estimated by JPMorgan analysts. They state that if GBTC's current 2% fee is not significantly reduced post ETF conversion, the outflow could "increase significantly."

The report notes:

Once the SEC approves a Bitcoin physical ETF in the US, we expect competition to intensify, and the average fee of Bitcoin ETFs will approach that of gold ETFs, currently around 0.5%.

Ark & 21Shares are the first publicly disclosed Bitcoin physical ETF fees, with a stated fee of 0.8% in previous applications. The co-founder of 21Shares mentioned in an interview that the inherent complexity of physically-backed products listed in the US led to the higher 0.8% fee.

This also indicates that GBTC must lower fees to avoid more significant capital outflows and maintain its dominant position as the largest and most liquid Bitcoin fund.

The analysts point out:

Over time, investors tend to gravitate towards the most cost-effective and liquid ETFs.

Capital Outflows Pose Downside Risks to the Crypto Market

Analysts suggest that if this $2.7 billion indeed exits the market entirely, such outflows would "certainly bring severe downside pressure to Bitcoin prices." However, they anticipate that most funds will move to other Bitcoin products such as other Bitcoin physical ETFs approved by the US Securities and Exchange Commission (SEC), which would have a milder negative impact on the market.

JPMorgan estimates that GBTC's current $23 billion asset size will decrease to $20 billion, while other funds will increase from $5 billion to $8 billion. Nevertheless, there is still a possibility of some funds leaving the Bitcoin-related market, so the risk remains tilted to the downside.

Recent reports also indicate that Grayscale has been meeting with officials from the US Securities and Exchange Commission's Trading and Markets Division to continue seeking approval for its Grayscale Bitcoin Trust GBTC conversion to a Bitcoin physical ETF.