GDLC Is A Sell Ahead Of Its Imminent, Likely Conversion To An ETF

Summary GDLC now trades at fair value after closing its NAV discount, removing the prior arbitrage opportunity that drove outperformance versus Bitcoin. With a 2.5% expense ratio, poor liquidity, and no clear portfolio role, I think GDLC is fundamentally unattractive compared to direct crypto or ETF exposure. If ETF conversion is approved, GDLC offers no upside (an ETF cannot trade at premium); if denied, it risks returning to a NAV discount, both scenarios unfavorable for new investors. Given these factors, I recommend a SELL on GDLC at current prices, as there is effectively no upside in any likely scenario. I think investors who already have GDLC are better off converting their position (trading at fair value) into more efficient, more liquid products. In the world of cryptocurrencies, there are several proxies and exotic products that investors can utilize to gain exposure to this asset class. Some of these may resemble a black box, commanding a NAV premium (or discount) against their mere holdings for reasons that are unclear and debatable. Today, I discuss again one of these tools: the Grayscale Digital Large Cap Fund ETF ( OTCQX:GDLC ), which contains a set of cryptocurrencies (mostly Bitcoin) and currently trades roughly in line with its NAV. GLDC outperformed Bitcoin despite never converting into an ETF I covered the Grayscale Digital Large Cap Fund ETF ( OTCQX:GDLC ) roughly one year ago , at the time refraining from a “BUY” because I did not see a conversion to an ETF as likely. Yet, I did see a decent risk / reward for anyone already having the fund in their portfolio (given it traded at a NAV discount at that time) and ended up recommending a “HOLD”. As I suspected back then, GDLC never converted into an ETF. Despite SeekingAlpha calling it an “ETF”, the issuer clearly states this is not an ETF in the dedicated GLDC page . Grayscale defines GDLC as a publicly traded fund quoted on the OTC Markets Group under the Alternative Reporting Standards, where investors can buy and sell shares through traditional brokerage accounts at market-dictated prices. To be clear though, Grayscale has filed a request to the SEC to convert GDLC into an ETF in September 2024. While the SEC has not yet ruled on this request, it is supposed to do so by July 2nd – in a few days from when this article was written. This reason is also why I am recommending a SELL today, as I will outline later in the article. Despite being right about GDLC not becoming an ETF, I recognize I was too cautious with my HOLD recommendation. As the chart below shows, in the last year GDLC outperformed Bitcoin ( BTC-USD ). When it comes to Bitcoin proxies, it was only beaten by MicroStrategy Incorporated ( MSTR ) during that time frame. Bitcoin miners lagged behind both BTC and GDLC. GDLC vs. BTC and proxies, 1 year (Seeking Alpha) This overperformance, in my view, is derived from GDLC closing its NAV discount and even briefly trading at a NAV premium a few months ago . Most of GDLC’s performance happened in late 2024 – something unsurprising given that’s exactly when Grayscale filed for the conversion of this fund into an ETF. GDLC traded at roughly a ~30% NAV discount one year ago, at the time of my first coverage. The gap closed and it even became a NAV premium of roughly 10% in April. Today, GDLC trades roughly in line with the value of its holdings as per my calculations below: BTC per share: 0.00036294 × $ 107,500 = $ 39.01 ETH-USD per share: 0.00220672 × $2,450 = $5.40 XRP-USD per share: 1.06345318 × $2.18 = $2.31 SOL-USD per share: 0.00935443 × $150 = $1.40 ADA-USD per share: 0.65811335 × $0.57 = $0.37 For a total of $ 48.51 worth of cryptocurrencies per share, against a share price of $ 47.40 at the time of writing, the fund trades roughly at the value of its NAV. This marginal discount of less than 2% is in my opinion negligible , especially considering the fund charges a hefty 2.50% yearly expense ratio to investors (more on these later). To note, if Grayscale succeeds into making GDLC into an ETF, this gap will close completely and permanently – as ETFs do not trade at a significant premium or discount against their holdings (net of fees and liquidity). My fundamental issue with GDLC as an investment: its objectives When I evaluate any fund or an ETF, I always start by asking myself what is the objective of such a fund and what role it may play in an investor’s portfolio. The main issue I have with GDLC is that I struggle to see any use case for investors. This fund is effectively a sort of relic of the past – it was launched in 2018, back when the regulatory framework for cryptocurrency was still fairly hostile and investors had difficulty gaining exposure to this asset class. In that context, paying a 2.50% fee for a somewhat illiquid product with questionable allocation to cryptocurrencies may have made sense to gain exposure to a nascent asset class. A plus back then was that GDLC represented one of the few SEC-registered crypto products. Today, crypto ETFs are available via normal brokerages and investors can also access crypto via increasingly regulated and safer centralized exchanges such as Coinbase Global, Inc ( COIN ). What’s more, is that the crypto space has matured since 2018 and, in my view, Bitcoin emerged as a clear winner of the space so far. Bitcoin’s dominance (Bitcoin’s market cap relative to the whole crypto space) is close to all time highs at ~65% , while it was in the low 40s when the fund launched. Many cryptocurrencies also became irrelevant in that time frame. GDLC’s holdings (reflecting the first five cryptocurrencies by market capitalization) show this, since the fund today features more than 80% of its holdings in Bitcoin itself. Even just one year ago, at the time of my first coverage, GDLC held Avalanche ( AVAX-USD ), a cryptocurrency that today it does not feature anymore, having been replaced by Cardano. I see such dynamics as reflecting a rapidly changing cryptocurrency landscape which makes GDLC fundamentally unattractive by design as a long term vehicle for crypto exposure. In simple words, I believe that investors wanting to gain exposure to cryptocurrencies would be better off simply buying them separately either as ETFs or via regulated crypto exchanges. That would also allow them to fine tune their exposure to the projects (and the weights) they deem best for their portfolios. Given an unclear use case of GDLC and the fact the fund trades already at a fair NAV valuation (which is set to remain as such in case of a successful ETF conversion), I do not see any other reason why it should keep overperforming in the future. GDLC vs. BTC and proxies, 3 months (Seeking Alpha) This is already observable in the last 3 months, when GDLC started to show a relative underperformance, returning just about the same as Bitcoin. I expect this trend to continue, and GDLC to keep performing in line with its underlying assets, net of its expenses. Why I recommend a SELL for GDLC ahead of its (likely?) ETF conversion The issues I described in the previous section are only compounded by the fund’s hefty yearly expense ratio, at 2.50%, as well as by its relative illiquidity. GDLC has a bid/ask spread of roughly 0.15%, and a risk grade, including tracking errors, that Seeking Alpha rates with a Failing grade (see picture below). GDLC Risk Grade (Seeking Alpha) In short, this is not a very efficient fund. A broad and passive exposure to cryptocurrency is also not achieved either by GDLC, given the fund’s exposure is mostly towards Bitcoin and Ethereum, which together make 91% of GDLC’s holdings. Which brings me back to my original issue with GDLC: its lack of a clear objective and role in one’s portfolio. Going forward, I see only two scenarios for GDLC: If the SEC approves its ETF conversion, the fund is already fairly priced and due to its hefty expense ratio and sub-par liquidity is set to slightly underperform its underlying assets. This scenario represents no upside for investors today. If the SEC does not approve its ETF conversion, I believe it reasonable the fund will start trading once again at a NAV discount , until there is a reason to believe a conversion will be likely again. This scenario represents a downside for investors today. Because of the above logic, I find myself having to recommend a SELL at current prices. The only scenario where I see GDLC performing is one where the ETF conversion does not get approved in July, but it gets approved in a few months – providing an arbitrage opportunity. I will cover this next in my risk section. Risks to my thesis The main risk to my thesis is that GDLC could keep outperforming Bitcoin. This happened already in the past year and might repeat in the near future, even if today GDLC trades already at a fair valuation and I do not see any reason the market would put a premium on its holdings. To be clear, I would only deem this scenario likely if the current ETF conversion does not get approved (if it does, there cannot be any NAV premium!). GDLC could then start trading again at a NAV premium, but only if there was some news emerging about investors’ ability to cash out their holdings. For example, a new potential ETF conversion (i.e. the SEC changing their mind shortly after refusing the conversion). Admittedly, this is a far fetched scenario – but one that I need to outline for readers as a risk. Conclusion: I see no upside in GDLC against BTC (or its underlying assets) I was too cautious in rating GDLC a “HOLD” one year ago, when I covered it for the first time. While I was technically correct in assuming the fund would not be transformed into an ETF (it hasn’t yet), this was no obstacle to GDLC’s closing its NAV premium, rallying on the news Grayscale filed for an ETF conversion in September last year. Today, ahead of its possible ETF conversion, GDLC trades at a fair value, from a 30% NAV discount one year ago. As a result, GDLC outperformed Bitcoin by more than 20% in that time frame. The issue with entering a position in GDLC today, however, is that there is effectively no upside in any scenario. If an ETF does get approved, the fund is fairly priced already, with a minimal 2% NAV discount. If an ETF does not get approved, the fund may again trade at a more significant NAV discount. The only scenario where GDLC could provide upside for investors is one where the ETF conversion does not happen and somehow the market starts assigning a NAV premium to GDLC. Highly unlikely, in my view, and the reason why I recommend a SELL at current levels. Note that my SELL rating is in no way associated to my views about BTC or the crypto space , but merely reflects the fact I think GDLC will underperform its underlying crypto assets in virtue of its hefty fees and illiquidity. In other terms, I believe investors who have GDLC would be better off converting their positions into more efficient funds, such as crypto ETFs or buying cryptocurrency directly via a centralized exchange. Personally, I am also against the idea of holding a set of cryptocurrencies as an investment, as I see Bitcoin as a very different investment than any other cryptocurrency. This is however something that goes beyond the scope of this article and that I covered in my Bitcoin pieces in the past.

Source: Seeking Alpha