Investors Grow Concerned About Grayscale’s Bitcoin Trust

In Brief

• Investor concern is growing around Grayscale's GBTC product that has been trading at a substantial discount to its net underlying asset value.
• Fir Tree Capital Management, an investment firm, has also asked the Delaware Chancery Court to investigate Grayscale's apparent mismanagement of customer funds.
• Other investors call for more drastic investor compensation and a reduction in fees while Grayscale tries to convert GBTC to an ETF.

Investors in Grayscale’s Bitcoin Trust worry that the company’s closed-ended product will harm clients as the discount between GBTC and the netasset value (NAV) of Grayscale’s Bitcoin holdings widens to roughly 46%.

Investors have urged the digital asset manager to offer lower administration fees and allow customers to redeem GBTC shares.

Grayscale Faces Complaints from Hedge Fund
Investment firm Fir Tree Capital Management and crypto investment fund manager 3iQ have joined the growing chorus of investors who say that Grayscale needs to move quickly to help restore investor confidence in crypto. Fir Tree criticized an apparent voluntary decision by the asset manager to make its fund closed-ended, restricting customers’ abilities to realize profits through redemptions.

Presently, only Grayscale can remove or create GBTC shares through periodic redemptions and private placements. Shares of GBTC have fallen 75% since the start of 2022.

Fir Tree has also asked the Delaware Chancery Court to investigate Grayscale’s alleged mismanagement of customer funds.

Founded in 2013, Grayscale’s Bitcoin Trust has $10.8 million in assets under management. Investment in the fund grew from $100 million to $1 billion between Sep. 2016 and Oct. 2017, riding on the 2017 bull market that saw Bitcoin peak at around $19,400 in late Dec. 2017.

Hedge Fund Rejects ETF Argument
According to Fir Tree, Grayscale faces minimal legal barriers to changing the status of its fund to restore the supply and demand imbalance. Restoring this imbalance would reduce the current discount between GBTC and Grayscale’s underlying Bitcoin asset value. Additionally, Fir Tree suggested that Grayscale’s reluctance was motivated by a potential profit loss if investors were allowed to redeem GBTC shares. Grayscale charges a 2% administration fee for the administration of its trust.

Grayscale has also claimed that the only legal way to introduce redemptions would be to convert GBTC to an exchange-traded fund (ETF). An ETF would track the Bitcoin price directly and reduce the discount by allowing investor discretion in redeeming shares. Grayscale has been locked in a court battle with the U.S. Securities and Exchange Commission after the agency rejected its initial application for the conversion.

Earlier this month, CEO Michael Sonnenshein said that the firm could issue a tender offer for 20% of outstanding GBTC shares to help return capital to investors. The asset management firm later rejected the idea of an “an ongoing redemption program” after Fir Tree’s complaint.

Litecoin Foundation director Alan Austin said that a 20% offer was insufficient to help most investors. Instead, he said, Grayscale should make a larger tender offer if the ETF application wasn’t approved by a specific date.

Others commented that Grayscale should consider dropping its annual administration fee.

Genesis Potential Insolvency Weighs on Investors
Compounding worries for investors, Grayscale’s sister company Genesis Trading recently paused customer withdrawals and loan originations from its crypto lending arm Genesis Global Capital. These suspensions came as the company suffered contagion effects from the collapse of FTX. Both Genesis and Grayscale fall under the umbrella of the Digital Currency Group (DCG).

While Genesis has denied insolvency claims, Bitcoin evangelist David Bailey suggested that DCG CEO Barry Silbert could put up Grayscale’s fees as collateral for bailing out Genesis. Such an arrangement would reduce the chances of a GBTC ETF conversion.

Grayscale has yet to respond to suggestions by 3iQ to allow customers to redeem GBTC for physical bitcoin. Earlier this month, the investment fund suggested that Grayscale issue a tender offer to convert GBTC shares to a vehicle that allows redemptions at Bitcoin’s NAV.

Disclaimer
BeInCrypto has reached out to company or individual involved in the story to get an official statement about the recent developments, but it has yet to hear back.