Osprey Bitcoin Trust: The Arbitrage Cowboys Ride Again

Summary Spot Bitcoin ETFs started trading in the US, marking a positive step for the cryptocurrency industry and Bitcoin as an investment. The NAV discount arbitrage window for Grayscale's Bitcoin Trust has closed, leading to a more stable discount rate. The Osprey Bitcoin Trust offers an opportunity to buy Bitcoin at a sizable discount to net asset value. Despite not yet filing to convert to an ETF, Osprey has disclosed a tender offer to buy up to 20% of the fund's outstanding shares at the NAV. On January 11th, 2024, spot Bitcoin ( BTC-USD ) ETFs started trading in US markets for the first time. This is an enormous positive step for the cryptocurrency industry and for Bitcoin specifically as an investable asset. Frankly, since Grayscale won its lawsuit with the SEC last year, the approval of these ETFs has been a somewhat expected formality . There are many implications from these approvals. Data by YCharts In anticipation of this decision, the NAV discount arbitrage window in the Grayscale Bitcoin Trust ( GBTC ) has effectively come to a close following the fund's successful conversion to an ETF. That discount rate currently sits at 1.55%. It's been a phenomenal trade from a 50% discount up to what is essentially fair value now and I'm happy to have been on the right side of that call over the last year. In my view, this is where the NAV rate will likely remain going forward. Bitcoin ETFs (IntoTheBlock) Now that investors have nearly a dozen additional spot Bitcoin ETFs to choose from, fees have become a race to the bottom and Grayscale's 1.5% fee is no longer competitive. That fee is likely being baked into the NAV discount. The point is, I don't foresee too much variance for the discount rate in GBTC any longer. For arbitrage traders with a digital asset-lean, that doesn't leave many options: Grayscale Fund NAV Rates (Author's Table/Calculations) We still have 13 additional single-asset Grayscale trusts that trade at significant premiums and discounts. As I noted with my coverage of the Grayscale Litecoin Trust ( LTCN ) late last year, I don't think it's wise to mess with these funds when they're trading several multiples above NAV. Shorting them is probably too dangerous given the nature of the market and the quickness with which digital assets can move. But if you're looking for discount arbitrage in a market that is finally being allowed to mature, your single asset Grayscale options are now limited to the Grayscale Ethereum Trust ( ETHE ) and the Grayscale Ethereum Classic Trust ( ETCG ). The Bitcoin pure play arb is gone. The Osprey Opportunity Fortunately, there is still another opportunity to buy Bitcoin at a sizeable discount to net asset value. The much lesser known Osprey Bitcoin Trust ( OBTC ) still trades with a double figure NAV discount: Data by YCharts With a 14% intraday NAV discount on January 12th when this article is being submitted, OBTC is trading near its steepest discount since early November. The discount rate in OBTC largely held tight with the rate in GBTC between late June and early October. The fund then started to vary a bit more. It lagged GBTC's discount move in October and then over-corrected in November. Since then, it has totally diverged from GBTC and offers quite a bit of potential upside if the price of BTC stays the same. Fund AUM Fee BTC per Share OBTC $109m 0.49% 0.000329 GBTC $28.6b 1.5% 0.000894 Source: Grayscales, Osprey While OBTC's fee is actually still far less than Grayscale's GBTC fee, Osprey has not yet filed to convert the fund to a spot ETF, despite Osprey CEO and founder Greg King stating it as a goal in a late 2022 blog post . It appears that instead of going the ETF route in the short term, seemingly in an effort to alleviate the NAV gap for OBTC investors, Osprey recently disclosed a tender offer to buy up to 20% of the fund's outstanding shares at the NAV. The offer is good until February 9th, but Osprey indicated in the filing that this could be extended. Given the timing of the tender offer being on the same day as the launch of the spot ETFs, the market reaction appears to be somewhat indifferent to this announcement. But I view this as a possible opportunity for arbitrage traders who are looking for another Bitcoin horse to ride now that the GBTC arb is effectively over. Even in the event that Osprey doesn't file to convert to an ETF, OBTC's fee is fairly competitive with the post-waiver fees of most of these funds, and certainly still cheaper than GBTC. Risks The major risk here is that the price of the underlying asset continues to go down. Arb trades are risky, can result in losses even if the discount window closes. For example, if an investor purchases OBTC at a 10% discount and the rate closed to 0% while Bitcoin declined in value by 15%, OBTC shareholders would be right on the arb but wrong on the return. The early indications from the immediate sessions following ETF approvals has been that it's a "sell the news event:" BTC Daily Chart (TradingView) After briefly touching $49k on January 11th, Bitcoin has gone down 12% virtually in a straight line to a little over $43k. Technically speaking, I feel this has been a much-needed pullback after what was a relentless 3-month rally for BTC. Another risk to consider is that the tender offer may not be enough to move the needle on the NAV discount. In that event, the fund's discount rate could continue to struggle against the spot ETFs from an investor interest standpoint and even possibly move lower. Summary I wouldn't go too heavy on this one because it's a smaller fund that doesn't have much visibility compared to the much larger firms that now offer competing products. That said, if you like arbitrage trades and don't particularly care to have Ethereum ( ETH-USD ) exposure, OBTC may be a fund to take a look at.