After a month of headlines about its flagship product, the Grayscale Bitcoin Trust (GBTC), trading at a negative premium, the world’s largest provider of cryptocurrency exchange-traded products (ETP) is resisting. In a post earlier this week, the global market leader with just over 75% of the total $ 61 billion in cryptoassets under management ETP announced that it will convert GBTC into an exchange-traded fund “when permitted”, that is, when the SEC is ready to approve its first bitcoin ETF.
While Grayscale has been thinking in this direction for a while, the announcement time can be seen as an acknowledgment that the company is facing competitive pressure from a cacophony of new Bitcoin ETF applications, including from the big company Fidelity.
Moreover, there appear to be some signs of investor concern: at least one of them – a group of activists from Marlton LLC – has asked Grayscale to conduct a modified tender offer at a Dutch auction to help compensate shareholders. I spoke with James Elbaor, managing partner of Marlton LLC, and he made it clear that he believes the grayscale is responsible for the negative premium. However, Grayscale vehemently rejected the suggestion that it exercised direct control over the prize and noted that they did not intend to offer such a tender offer. This view is shared by at least one prominent securities lawyer who worked on the very first Bitcoin ETF statement in the US, Gregory Xsetalis, a partner at Chapman and Cutler LLC. He told Forbes in an interview that “under [GBTC] trust deed and Delaware sponsor law [Grayscale] has limited fiduciary responsibilities, and maintaining a premium to the secondary market share price is not one of them. ” It’s also worth noting that Grayscale filings indicate the potential for both positive and negative premiums.
Grayscale Roadmap for Bitcoin ETFs
The Grayscale announcement provides a systematic four-step approach to ETFs, albeit without a timeline:
- Launch of a private placement. A fund whose shares are available only to wealthier investors, where the original purchases are controlled by the issuing party.
- Getting a quote on the secondary market. After the purchased shares have completed the blocking period (often 6-12 months), they can be listed on exchanges for public trading. At this stage, the initial purchasers receive money from the private placement shares by selling them to a wider range of investors. GBTC, as well as its products offering access to Ether (ETHE), litecoin (LTCN), Ethereum Classic (ETCG) and Graysclae Composite Large Scale Fund (GDLC), are currently traded on OTCQX.
- Launch of the SEC reporting phase. The decision of the fund issuer to adopt the SEC oversight and reporting requirements to make a private placement more transparent than a regular private placement. It also helps reduce the blocking period for private placement shares from 12 months to six months. Currently, only GBTC and ETHE are reporting.
- Converting SEC Reporting Funds to Crypto ETFs. The process by which an issuing entity issues shares of an ETF in exchange for the initial shares of a private offering.
This is a regimented process that should not be taken for granted. The second of these steps, placing a sufficient number of shares in a secondary market such as the OTC Markets OTCQX exchange cannot fully assume that this will happen automatically, and the liquidity of the fund can help illustrate this point.
Grayscale claims that GBTC, which has a $ 38.1 billion AUM, is one of the most liquid bitcoin investment products in the world. That being said, 98% of GBTC shares were never sold, which means that the trading volume is actually much lower than its AUM. Exchanges require healthy trading volumes to list assets, so this can be a problem for cryptoassets with smaller market caps.
How shades of gray try to deal with it
Grayscale has taken some small steps to address the issue, such as allowing parent company Digital Currency Group to buy up to $ 250 million in GBTC shares, along with announcing its ETF roadmap. It is also worth noting that the GBTC product is closed to new investors, which will prevent the issuance of new shares. At the same time, the closed period began in December, when the premium was still positive.
It also laid the foundation for one of the largest product line extensions in history. He has applied to register dozens of new trusts in Delaware that are expanding his reach into new areas of crypto, such as DeFi and privacy coins. Two weeks ago, it also launched five new assets that offer access: Basic Attention Token (BAT), LINK, MANA, filecoin, and livepeer. Obviously, Grayscale hopes to be able to use its credibility, as well as regulators and institutional investors, to create significant positions in some of these new assets, where there are far fewer competitors to ETP.
Will history repeat itself?
It is unclear how the GBTC premium problem will play out, and there is no guarantee that moving it to an ETF will solve the problem (although ETFs tend to track their net worth due to higher trading liquidity). Plus, the industry is still waiting for its first. Second, this issue could reappear in other Grayscale products with much longer ETF horizons in the future.
For example, Ethereum is by far the second largest blockchain and product offered by GBTC, and its premium went negative two weeks ago and is less fanciful (currently at -8.70%). This drop is in some ways more curious as ETHE doesn’t have the same list of competitors as GBTC. An Ethereum ETF is unlikely to come to the rescue for this product, let alone other offerings if and when they go public.