Trouble coming …
Size helps but can be extremely problematic in a bear market
GBTC, run by digital asset manager Grayscale, was an early vehicle through which mainstream?investors could gain exposure to crypto without having to hold tokens. That and a bullish bitcoin narrative meant that the trust long traded at a high premium to NAV. This reversed in 2021 due to market volatility and emergence of custody platforms and ETFs. The negative basis widened further recently when?crypto prime broker Genesis—Grayscale's sister company within Digital Currency Group (DCG)—admitted a USD175m exposure to the now-bankrupt FTX and suspended withdrawals from its high-yield deposit platform. It also warned of bankruptcy unless it gets USD1b in new capital.
DCG's fundraising approaches to Binance and others have been turned down, so the group's other assets such as CoinDesk could be up for sale. As well as owning Grayscale (the fund manager), DCG?is the largest holder of GBTC?shares (9.7% according to Bloomberg) and could also potentially decide to sell its holdings to raise cash. This stake is presently worth USD600m, 12 times greater than the?three-month average of the trust's daily trading volume. Thus, a sale?would surely widen GBTC's discount, but not necessarily affect the price of bitcoin. That wouldn't be true, though, if GBTC?itself were liquidated because fund rules stipulate investors must be paid out in cash. We believe the sheer size of GBTC's holdings—633k BTC, or 3.3%?of all coins mined—would spell trouble for the entire market, as bitcoin still comprises more than 45% of the space ex stablecoins. Still, for several reasons we believe liquidation remains unlikely.
For one thing, GBTC?is a crown jewel for DCG?given its 2%?management charge brings in over USD210m annually. This fee is levied irrespective of performance or discount to NAV; the shares are not redeemable: an application for ETF conversion has been rejected by the SEC. Other Grayscale trusts holding ETH, ETC, etc., with similar structures bring in a further USD100m annually. Second, SEC filings do not contain any language showing a shareholder vote could force the trust's dissolution. Otherwise Grayscale only has to remain liquid and solvent to keep running the fund. Finally, liquidating GBTC and realizing the discount (via receiving the underlying BTC)?would be profitable to DCG?but would only fetch c.USD440m at best (assuming all bitcoin could be sold at the current price, which seems unlikely), which would barely offset two years of recurring annual income from the trust. The bottom line is that many investors are concerned but are yet to panic about any of these things, in our view.?Bitcoin implied vols are not especially high but retain a very negative skew to puts, albeit less so than a fortnight ago. |
