ARK Invest, the investment firm led by Cathie Wood, has swapped another $15 million worth of shares in the ProShares Bitcoin Strategy ETF (BITO) for its own ARK 21Shares Bitcoin ETF (ARKB) on Friday, according to a filing with the Securities and Exchange Commission (SEC).
This is the second time that ARK has made such a move, after swapping $20 million of BITO for ARKB on Wednesday. The firm now holds about $35 million of ARKB, which is the first actively managed bitcoin ETF in the US.
ARKB, which launched on January 10, aims to provide exposure to bitcoin by investing in bitcoin futures contracts and other bitcoin-related instruments. The fund charges a 0.95% expense ratio and has an initial target allocation of 60% bitcoin futures and 40% Grayscale Bitcoin Trust (GBTC).
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BITO, on the other hand, is a passive ETF that tracks the performance of the CME CF Bitcoin Reference Rate, a benchmark that reflects the price of bitcoin based on spot and futures markets. BITO charges a 0.95% expense ratio and invests solely in bitcoin futures contracts.
By swapping BITO for ARKB, ARK is betting on the superior performance of its own fund, which has more flexibility and diversification than BITO. ARK also believes that ARKB will benefit from the growing adoption and innovation in the bitcoin ecosystem, as well as the potential approval of a spot bitcoin ETF in the future.
ARK is one of the most prominent and influential investors in the crypto space, with over $1 billion worth of GBTC and over $300 million worth of Coinbase (COIN) shares across its various funds. The firm also holds stakes in several crypto-related companies, such as Square (SQ), PayPal (PYPL), Robinhood (HOOD), and Twitter (TWTR).
The Grayscale Bitcoin Trust (GBTC) is one of the most popular ways for investors to gain exposure to Bitcoin without having to buy and store the cryptocurrency themselves. However, the trust has been underperforming the price of Bitcoin in recent months, leading to a large discount in its shares compared to the underlying asset value. This has prompted some investors to sell their GBTC shares and seek other avenues to invest in Bitcoin, such as exchange-traded funds (ETFs) or spot markets.
According to a report by JPMorgan, the outflows from GBTC have been significant and could continue in the near future. The report estimates that about $1.5 billion worth of GBTC shares have been sold since mid-November 2021, representing about 9% of the total assets under management (AUM) of the trust. The report also suggests that the outflows could accelerate as more GBTC shares become unlocked and eligible for sale in the coming weeks.
The main reason for the GBTC discount is the lack of an arbitrage mechanism that would allow investors to buy GBTC shares at a discount and redeem them for Bitcoin at a premium, thus narrowing the gap between the two prices. However, GBTC does not offer such a redemption option, and instead relies on periodic creations of new shares by accredited investors who depo1sit Bitcoin into the trust. These investors have to wait for six months before they can sell their GBTC shares on the secondary market, creating a supply and demand imbalance that affects the price.
The report argues that the introduction of Bitcoin ETFs in the US could provide a more efficient and liquid alternative for investors who want to access Bitcoin through a regulated vehicle. The report notes that several Bitcoin ETF applications are pending approval by the Securities and Exchange Commission (SEC), and that some of them could launch as early as February 2022. The report expects that these ETFs would trade at a much smaller premium or discount than GBTC and would also offer a redemption option that would allow investors to exchange their ETF shares for Bitcoin or cash.
The report concludes that the outlook for GBTC is challenging, and that its AUM could decline further as more investors switch to other Bitcoin products. The report also warns that the GBTC discount could have a negative impact on the price of Bitcoin itself, as it reduces the demand for the cryptocurrency from institutional investors who use GBTC as a proxy.