Investors Are Worried About Grayscale’s Bitcoin Trust

Investors in Grayscale’s Bitcoin Trust are concerned that the company’s closed product will hurt customers because of the discount between GBTC and NET. The asset value (NAV) of Grayscale’s bitcoin holdings widened to nearly 46%.

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

Grayscale receives complaints from hedge funds

Investment firm Fir Tree Capital Management and crypto investment fund manager 3iQ have joined a growing chorus of investors who say Grayscale needs to move quickly to help restore investor confidence in crypto. Fir Tree criticized an apparent voluntary decision by the asset manager to wind up its funds, restricting clients’ abilities to realize gains through redemptions.

Currently, only Grayscale can delist or create GBTC shares through redemptions and private placements from time to time. GBTC shares are down 75% since the start of 2022.

grayscale gbtc share price
GBTC/USD | Source: YCharts

Firtree has also asked the Delaware Chancery Court to investigate alleged mismanagement of client funds by Grayscale.

Founded in 2013, Grayscale’s Bitcoin Trust has $10.8 million in assets under management. Investments in the fund grew from $100 million to $1 billion between September 2016 and October 2017, riding the 2017 bull market that saw bitcoin reach nearly $19,400 in late December 2017.

Hedge fund defies ETF argument

According to Firtree, Grayscale faces minimal legal barriers to changing the status of its funds in order to restore the balance of supply and demand. Restoring this imbalance would reduce the existing discount between GBTC and Grayscale’s underlying bitcoin asset value. Additionally, Firtree suggested that Grayscale’s reluctance was motivated by potential profit loss if investors were allowed to redeem GBTC shares. Grayscale charges a 2% administration fee to administer its trust.

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

Earlier this month, CEO Michael Sonnenshein said the firm may issue a tender offer for 20% of outstanding GBTC shares to help return capital to investors. The property management firm later rejected the idea of ​​an “ongoing redemption program” following Firtree’s complaint.

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

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

Genesis potential insolvency weighs on investors

Grayscale’s sister company Genesis Trading recently raised compounding concerns for investors and halted customer withdrawals and loan originations from its crypto lending arm Genesis Global Capital. These suspensions came as the company faced contagion effects from the FTX collapse. Both Genesis and Grayscale fall under the umbrella of the Digital Currency Group (DCG).

While Genesis has denied the bankruptcy claims, bitcoin evangelist David Bailey suggested that DCG CEO Barry Silbert could hold Grayscale’s fees as collateral to bail out Genesis. Such an arrangement would reduce the possibility of change in the GBTC ETF.

Grayscale has not yet responded to suggestions from 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 into a vehicle that allows redemptions at the NAV of bitcoin.

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BeInCrypto has reached out to the company or the person involved in the story for an official statement regarding the recent development, but has yet to hear back.

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