In a new analysis, JPMorgan has raised concerns about the potential outflow of funds following the possible conversion of Grayscale Bitcoin Trust (GBTC) into an ETF. The banking giant estimates that the conversion could prompt investors to withdraw at least $2.7 billion.

The Grayscale Bitcoin Trust, a pivotal force in the previous bull market, has seen its discount to Bitcoin’s current market price shrink from -46% at the beginning of the year to -9.77% by November 22, the lowest level since mid-August 2021. Notably, this reduction in discount is important because it indicates that investors are expecting the US Securities and Exchange Commission (SEC) to approve Grayscale’s conversion to a spot Bitcoin ETF. However, JP Morgan has cautioned that this conversion might lead to some instability in the market.

$2.7 Billion Exodus Following Bitcoin ETF Approval?

JPMorgan analysts, including Nikolaos Panigirtzoglou, have scrutinized the inflows into GBTC since the beginning of 2023, revealing a calculated strategy by traders to exploit the discount for profit upon ETF conversion. The bank’s methodology considered the cumulative signed dollar volume, accounting for both the volume of shares traded and the direction of the price movement.

The analysts posit that this influx, primarily driven by speculation over GBTC’s conversion to an ETF, will likely reverse as investors seek to capitalize on the arbitrage opportunity presented by the narrowing of the discount to net asset value. The minimum anticipated outflow, upon conversion to an ETF, stands at $2.7 billion.

However, this could escalate if GBTC’s current fee structure, standing at 200 basis points, isn’t significantly reduced post-conversion. The competitive landscape, as suggested by the ARK 21Shares Bitcoin ETF’s 80 basis points fee, necessitates such a reduction for GBTC to maintain its market dominance.

The impact on the market could be profound. A full withdrawal of the $2.7 billion could exert substantial downward pressure on Bitcoin prices. However, JPMorgan analysts believe that much of this capital will likely be reallocated to other Bitcoin-related instruments, mitigating any drastic market disturbance.

They predict a reconfiguration of assets, shifting from $23 billion in GBTC and $5 billion in other funds to $20 billion in the trust and $8 billion in other vehicles. Nonetheless, they caution that a portion of the funds may exit the Bitcoin space entirely, which would pose a risk of a downturn in Bitcoin prices.

Remarkably, JP Morgan analysts led by Panigirtzoglou have predicted in early September that the SEC will be forced to approve spot Bitcoin ETFs after losing the case against Grayscale. Moreover, JP Morgan’s forecast hinges on the assumption that the approval of a batch of ETFs will ignite more intense competition among Bitcoin investment products, likely resulting in a fee structure more aligned with those of Gold ETFs, typically around 50 basis points.

As the market awaits the SEC’s decision, the primary concern remains: Whether the anticipated GBTC outflows will find a new home within the Bitcoin space or if they will signify a broader withdrawal from BTC investments.

At press time, BTC traded at $37,560.

BTC price continues its uptrend, 1-day chart | Source: BTCUSD on TradingView.com

Featured image from Veri-Media, chart from TradingView.com