SEC Approves Conversion of Grayscale’s Large-Cap Cryptocurrency Fund to ETF
Grayscale has narrowed arbitrage trading opportunities on its cryptocurrency trust funds by converting them into exchange-traded funds.
SEC Approval and Fund Composition
Asset management company Grayscale has received approval from the U.S. Securities and Exchange Commission (SEC) to convert its Digital Large Cap Fund into an exchange-traded fund (ETF). The fund comprises the five largest cryptocurrencies by market capitalization as outlined in the CoinDesk Five Index.
The fund’s weighting structure includes Bitcoin (BTC) at 80.2%, Ethereum (ETH) at 11.3%, XRP (XRP) at 4.8%, Solana (SOL) at 2.7%, and Cardano (ADA) at 0.81%.
Impact on Arbitrage Trading
Investors have long exploited arbitrage opportunities with Grayscale’s cryptocurrency trust funds, capitalizing on premiums or discounts to net asset value (NAV) to lock in profits. These opportunities primarily stemmed from the lock-up periods of the trust funds and the lack of in-kind redemptions.
However, these opportunities have gradually diminished since Grayscale began converting its private digital asset trust funds to ETFs. According to the official announcement, “The Fund’s investment objective is for the value of the shares to reflect the value of the digital assets held by the Fund, determined by reference to the Index Price and corresponding weightings in the Fund, less the Fund’s expenses and other liabilities.”
Legal Victory and Industry Significance
In June 2022, Grayscale filed a lawsuit seeking to convert its Bitcoin trust fund to an ETF after the SEC rejected their application. The legal battle lasted about a year, and in August 2023, a U.S. judge ruled that the SEC had been “arbitrary and capricious” in rejecting the conversion request and approved Grayscale’s petition.
Grayscale is a pioneer in the cryptocurrency investment field, providing investors with access to digital assets without facing the technical challenges of holding cryptocurrencies directly. The conversion of the company’s cryptocurrency trust funds to exchange-traded funds signals the end of an era and the maturation of the industry.
Current Market Position
Grayscale’s Bitcoin trust fund now trades as an ETF with an expense ratio of 1.5%, making it the most expensive Bitcoin ETF on the market and the highest-grossing BTC investment vehicle. This conversion represents a significant milestone in the evolution of cryptocurrency investment products.