The Walking Dead: Grayscale’s GBTC

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Written by

Pantera

Bitcoin Is Cash

1 year ago

Topics: Grayscale, DCG, Bitcoin, Bitcoin Cash, Investing, ...

What Will Happen to Grayscale Trusts?

GBTC shares trade way below the spot price of Bitcoin (BTC) since early 2021.

The rest Grayscale products follow the path of GBTC. The possibility of GBTC, ETHE, and other Grayscale Trusts returning to premium is slim.
DCG also faces severe challenges following the downfall of its subsidiary trading desk, Genesis.

To make things worse, the SEC rejected a Grayscale proposal to transform the GBTC trust into a spot ETF, leading Grayscale to sue the SEC and buy some more time.

Currently, Grayscale awaits the court decision that will decide the fate of this fund.

We explore what can happen to Grayscale trusts, as for the past two years the fund aimlessly wanders the crypto abyss with no clear plan or vision.

Grayscale Trusts

DCG (Digital Currency Group) is the parent company of Grayscale (also owns Coindesk), and the now defunct Genesis Trading OTC desk while also extending into hundreds of investments within the crypto industry (DCG’s portfolio here).

In simple terms:

Grayscale created the first legal product for US institutions and wealthy investors to invest in Bitcoin (since 2013).

The first Grayscale trust was the Bitcoin Trust (GBTC).

A few years later, Grayscale created more trusts allowing institutional investing in Ethereum, Litecoin, and Bitcoin Cash, among others.

Grayscale uses Coinbase as the custodian that maintains the keys to the cryptocurrencies backing the Trust. Investors buy the Trust shares, and Grayscale purchases the cryptocurrencies from Coinbase.

Grayscale does not offer a redemption option. Investors control the Trust shares without access to Coinbase Custody accounts.

These Trust shares have a lockup period of 6–12 months (depending on the SEC approval), and after that period, investors can trade the shares in a secondary (regulated) OTC market (OTCQX).

OTCQX is the only market a Grayscale Trust investor can sell their shares.

Grayscale GBTC and EETH became popular as they offered extreme premiums to early investors.

Although, these premiums did not last.

Besides the price action in spot exchanges, investing risk included having to wait for one year before taking advantage of any premium by selling trust shares in the OTC market since the GBTC, ETHE, and all Trust shares included one-year mandatory vesting (later, the vesting period was reduced to 6 months).

For the whole of 2020, Grayscale was buying BTC, as investors wanted to take advantage of Grayscale’s premium in the OTC market, especially when the SEC permitted lowering the vesting period to 6-months.

However, at the beginning of 2021, everything changed.

The GBTC Disaster

GBTC currently (June 26th, 2023) trades at a 33% lower price than in cryptocurrency spot exchanges (Coinbase).

Grayscale is now suing the SEC, but the odds to win this case are minimal.

Nobody was interested in buying GBTC and the rest of Grayscale Trusts since 2021 in the OTC market, and volumes dropped remarkably.

Grayscale failed to attract volumes as several Bitcoin Spot ETFs were launched in Canada and Europe, unofficially downgrading Grayscale’s products.

Grayscale lost its prestige as the only regulated option to invest in cryptocurrency for institutions in the US.

Institutions and investors seeking “exposure” in Bitcoin (BTC) bought the Canadian ETFs instead of GBTC.

In June 2022, Grayscale sued the SEC over its decision to accept other futures ETFs but not Grayscales (and other funds) spot ETF proposals. It appears the SEC verified its firm stance on December 12th, 2022, citing oversight concerns quoting NYSE:

“fraud and manipulation may exist and that bitcoin trading on any given exchange may be no more uniquely resistant to fraud and manipulation than other commodity markets.”

- From: Grayscale — DCG, A Looming Collapse Of Monumental Proportions

Grayscale couldn’t foresee investors would flee to Canadian spot ETFs like BTCC and the extent of competition ETFs will present.

Grayscale was too slow to act against what was coming, and the odds of success evaporated as sister company Genesis bankrupted in November 2022 (Genesis Trading COLLAPSES! Grayscale/DCG & Gemini Are Next).

Meanwhile, Grayscale is profitable as it keeps extracting 2% yearly as fees from investors who seem trapped with no choice but to either watch their investment shrink by 2% each year or sell at a horrible discount.

Other Grayscale Trusts

Besides the vast GBTC discount, we also find most of the top Trusts Grayscale offers in a similar, or even worse position:

(source)

Interest is low on the secondary OTC market for Grayscale products, and the price is well below the spot.

EETH trades at -50%, while ETC trades at a 60% discount.

LTCN (Litecoin) also stands at a 44% price lower than the spot.

Bitcoin Cash and Zcash seem closer to their spot price with a 15% discount.

Grayscale's Reaction

Actually, since January 2021, Grayscale serves no purpose.

To counter the negative outlook, the fund pushed two alternatives:

It tried to convert GBTC into a spot ETF, meeting a categorical denial by the SEC and later moving on to sue the SEC, probably hoping to buy some more time when dealing with the current macro situation and the lack of new investors and prospects.
The company created more Trusts with several more tokens and an Index of these tokens, hoping institutions would want to invest in less popular tokens like MANA, Cardano, Solana, BAT, and Filecoin, among others.

That didn’t turn out great either, as the SEC has already announced that most PoS tokens are securities.

After the SEC rejected the Grayscale spot ETF, the fund sued the SEC, hoping they could reverse the financial authority policies in court.

Interest is low on the secondary OTC market for Grayscale products, and the price is well below the spot.

EETH trades at -50%, while ETC trades at a 60% discount.

LTCN (Litecoin) also stands at a 44% price lower than the spot.

Bitcoin Cash and Zcash seem closer to their spot price with a 15% discount.

Grayscale’s Reaction

Actually, since January 2021, Grayscale serves no purpose.

To counter the negative outlook the fund pushed two alternatives:

It tried to convert GBTC into a spot ETF, meeting a categorical denial by the SEC and later moving on to sue the SEC, probably hoping to buy some more time when dealing with the current macro situation and the lack of new investors and prospects.
The company created more Trusts with several more tokens and an Index of these tokens, hoping institutions would want to invest in less popular tokens like MANA, Cardano, Solana, BAT, and Filecoin, among others.

That didn’t turn out great either, as the SEC has already announced that most PoS tokens are securities.

Currently, for any of Grayscale’s Trusts, the only hope is the SEC reversing its decision, reaching a compromise, and admitting defeat to Barry Silbert.

Gemini

Gemini exchange lent out crypto worth several hundreds of millions of USD from its custodian program Gemini Earn to Genesis, and probably will only recover a small percentage of these funds, leading to vast losses for the customers of Gemini.

The Winklevoss twins often appear on social media condemning Barry Shilbert and DCG’s practices. Still, we have had no news on this matter since April. The Genesis liquidation procedure reached a deadlock in April 2023 when some Genesis creditors backed down from a restructuring agreement, aiming to negotiate better terms.

A Possible Scenario: Liquidation Of The Fund

Grayscale suspended redemptions of GBTC in 2016 after the trust violated an SEC rule.

All Grayscale trusts trade at a vast discount (40%-50%), so perhaps the best move is to dissolve Grayscale entirely and distribute the cryptocurrencies to the hands of the investors.

Without transforming into ETFs, Grayscale Trusts will serve no purpose.

- As previously mentioned here: Grayscale — DCG, A Looming Collapse Of Monumental Proportions

The lawsuit against the SEC bought some time, but is there a realistic possibility at this stage?

While some analysts suggest that the SEC will eventually accept a Bitcoin spot ETF, why should that be Grayscale’s ETF?

BlackRock, a nine trillion dollar behemoth, will soon apply for a Bitcoin spot ETF, and that only worsens Grayscale’s position as BlackRock would want to secure its competitive advantage.

The first spot ETF in the US will be a first mover.

Perhaps the only option for Grayscale to protect its investors is to enter negotiations with BlackRock.

Unless Grayscale miraculously wins the lawsuit against the SEC, the future for Grayscale seems bleak.

In Conclusion

Grayscale was the driving force of Bitcoin BTC until 2020. In the first two quarters of 2020, the fund was buying all the newly mined BTC.

Yet, the Grayscale model failed massively as the volumes in the OTC market (the only market Grayscale Trusts trade) evaporated.

There is no redemption either, so institutions and investors of GBTC and other Grayscale Trusts seem unable to exit.

Even at 40 or 50% discount rates, buyers are not available. The volumes are small in the OTC market, and the price of GBTC is fragile.

The SEC denied Grayscale’s spot ETF, and the fund now awaits a favorable decision in its lawsuit against the SEC.

But are the odds in favor of Grayscale in this case? If Grayscale fails to convince the court, it will require decisive action to protect investors from further losses.

The era of DCG dominating the crypto industry appears to be over as the big guns of finance enter the cryptocurrency arena.