Grayscale must fight for its control over the flagship bitcoin trust

Grayscale and Digital Currency Group (DGC) have many faults, but dogged determination is not one of them.

Grayscale attempted to convince the US Securities and Exchange Commission to convert the Grayscale Bitcoin Trust, the largest bitcoin-only investment vehicle in the world, into a spot exchange traded fund (ETF).

Despite repeated protestations from Grayscale and other market participants, the SEC has not shown interest in allowing such products. They argue that current fraud and manipulation protections do not adequately protect customers.

Grayscale filed a new petition before the US Court of Appeals on Friday, January 13, calling the SEC’s refusal “arbitrary to it core” and “illogical” in light of the SEC’s granting permission for bitcoin futures contract.

Grayscale stated that there is no reason to conclude that surveillance protects ETP holders adequately from one type of ETP and not the other.

Grayscale stated that the SEC should be declared illegal and overturned.

The 850,000+ GBTC investors who have witnessed their shares fall would benefit greatly from the conversion of GBTC to a spot ETF.

The problem with GBTC lies in its structure. Although new shares can be created in the product, they cannot be redeemed. Grayscale chief executive Michael Sonnenshein has rejected redemptions. Investors are left with one option: Sell them to a buyer if they wish to exit.

Sellers are difficult to find when the market has become so depressed in the last 13 months. Unless sellers are willing and able to part with substantial discounts.

This causes trust shares to perform poorly against their underlying bitcoin holdings. In GBTC’s instance, the discount has been as high as 50% in recent years.

Although bitcoin (BTC), has seen a sharp rebound in recent weeks, the gap has narrowed but still represents a 36% discount on net asset value (NAV).

Grayscale is under tremendous pressure to be good for its shareholders.

Fir Tree Capital Management filed a lawsuit against Grayscale on December 20, 2022 to try and force the trust into allowing redemptions.

Grayscale’s 850,000 investors have been “harmed by Grayscale’s shareholder-unfriendly actions,” said Fir Tree, which also wants Grayscale to cut its exorbitant 2% fee rate.

Fir Tree also criticised Grayscale’s annual fees that were based on the value of assets under management, rather than the discount share price.

Continue reading: Grayscale faces legal action for its US$10.7bn Bitcoin trust

Grayscale’s parent company DCG has offered to become the trust’s sponsor.

In an open letter addressed to Barry Silbert, Greg King, chief executive of Osprey, wrote that Grayscale should withdraw as sponsor for GBTC and instead name Osprey sponsor.

The letter stated that Osprey Funds should be installed as the sponsor of GBTC immediately to protect GBTC owners and give confidence to Grayscale stakeholders who are not DCG-affiliated and have an interest in preserving value.

Osprey made these recommendations to support the bid:

Reduce the management fee to 0.49 % and eliminate significant conflicts of interests in the expense structure

As soon as possible, implement a redemption plan

You can immediately seek a listing on New York Stock Exchange by bypassing the SEC. In addition, you can work directly with Congress to educate the regulator about the “reason for approving the fund to be exchange-listed, ETP.”

Grayscale is not inhabited only by Ospreys.

Steven McClurg, co-founder of Valkyrie Investments, announced his interest in the company on December 28, 2022.

He stated that Grayscale had played an important role with the growth and development of bitcoin’s ecosystem through the launch of GBTC. We respect their work and acknowledge the efforts they made.

“Despite the recent events surrounding Grayscale and its affiliated companies, it’s time to make a change. Valkyrie is the best company for managing GBTC so that investors are treated fairly.”

Grayscale may have to fight for its flagship fund with the vultures in its vicinity.

Investors are ultimately the most important, so maybe it is time to pass the baton.

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