ETF premium and discount

Imagine a share whose net assets are valued at 50 USD in the NAV calculation. A buyer on the exchange currently pays 51 USD for it. That extra dollar is a premium of 2 % over NAV. A market price of 49 USD instead represents a discount of 2 %. In the formula (P/NAV−1)×100, P means market price; the result is positive 2 % or negative −2 %. The denominator is NAV per share, not bitcoin’s price or the product’s total assets. These are our illustrative figures, not live quotes. [1]

A trading screen normally shows two offers. The bid is what someone will pay to buy your share; the ask is what someone charges to sell you one. In our simultaneous example, the bid is 49.90 USD, the ask 50.10 USD and NAV 50 USD. Their midpoint sits exactly at NAV. Yet buying at the ask and immediately selling at the bid, with those quotes unchanged, loses 0.20 USD per share before any other costs. This gap is the bid–ask spread. It is separate from a premium or discount, and the last traded price need not be an offer you can execute now. [1]

Bitcoin trades around the clock; an exchange-listed share follows its exchange’s trading hours. For iShares Bitcoin Trust ETF, known as IBIT, the prospectus dated July 31, 2025 describes the CF Benchmarks Index: a reference price built from bitcoin trades during the 15:00–16:00 ET window, using U.S. Eastern Time. The closing share price may already reflect a late bitcoin price move, while the index incorporates the whole window. Part of the apparent gap can therefore come from the valuation method. Yesterday’s NAV is not today’s value. IIV, the intraday indicative value per share, is not a newly approved official NAV either. [2] [3]

Return to the purchase at 51 USD with NAV at 50 USD. Later NAV remains 50 USD and you sell for that same amount. Price and asset value have converged, but you paid more than you receive back. With no distributions or costs, the price return is (50/51−1)×100, approximately −1.96 %. The premium fell by 2 percentage points, whereas your loss is calculated against the 51 USD purchase price. The two changes therefore do not have the same numerical value. [1]

An Authorized participant, or AP, is a financial institution with contractual access to creating and redeeming large blocks of shares. Where a usable premium exists, it can supply the required assets or cash under the product’s rules, receive new shares and sell them on the exchange. At a discount, it can buy shares and submit them for redemption to the issuer, the entity that issues them. Seeking to exploit this price difference is called arbitrage. The resulting supply and demand can bring prices closer. But the AP needs executable trades, the required volume and completed transfers; a gap on a chart does not create a profit by itself. [2]

The cited IBIT prospectus uses a basket of 40 000 shares. Direct creation and redemption are available to eligible APs; an ordinary investor cannot present one share and demand its NAV. An AP is not required to intervene whenever a gap appears either. Trading costs, financing and operational constraints matter. If creations or redemptions are suspended, the mechanism may work less effectively. A premium or discount can therefore persist, and a published figure promises no date when market price and NAV will meet again. [3]

Now suppose you buy at 49 USD while NAV is 50 USD. That sounds like a bargain. Later the assets lose value: NAV and the selling price are both 45 USD. The discount has gone, but selling returns less than you paid. Without distributions or costs, the loss is 4/49, approximately 8.16 %. Your result depends both on what happens to the assets themselves and on how the premium or discount changes. Comparing two prices at one moment does not protect you from their falling later. [1] [2]

Start with the precise product, share class and currency. Then check the time of the NAV and whether the market figure is a closing price, last trade, bid, ask or midpoint. Its history becomes useful only once you understand that method. Also check the legal scope of your sources: the cited bulletin from the U.S. regulator SEC discusses ETFs registered under the 1940 Act. IBIT is not an investment company registered under that Act. A holder’s rights come from the particular product’s documents, not simply from ETF appearing in its name. [1] [3]