After a month of headlines on its flagship product, the Grayscale Bitcoin Trust (GBTC), trading at a negative premium, the world’s largest provider of crypto-traded products (ETP) is fighting back. In an article published earlier this week, the world market leader with just over 75% of the $ 61 billion ETP crypto assets under management announced that it would convert the GBTC to an exchange-traded fund “when that is allowed ”, that is, when the SEC is ready to approve its first bitcoin ETF.
While Grayscale has been thinking in this direction for some time now, the timing of the announcement could be seen as an acknowledgment that it is feeling the competitive pressure from a cacophony of new Bitcoin ETF applications, including that of the heavyweight. of the Fidelity industry.
Additionally, there appear to be signs of investor unrest, with at least one – activist group Marlton LLC – asking Grayscale to conduct a modified Netherlands auction takeover bid to help compensate shareholders. I spoke with James Elbaor, Managing Partner at Marlton LLC, and he made it clear that he held Grayscale accountable for the negative premium. That said, Grayscale strongly rebutted the assumption that it has direct control over the premium and noted that it has no intention of making such a takeover bid. This is a perspective shared by at least one prominent securities lawyer who worked on the very first bitcoin ETF application in the United States, Gregory Xethalis, partner at Chapman and Cutler LLC. He told Forbes in an interview that “under the [GBTC] Delaware trust agreement and law a sponsor [Grayscale] has limited fiduciary obligations and maintaining a secondary market share price premium is not one of them ”. It should also be noted that Grayscale’s filing documents indicate the potential for positive and negative premiums.
Grayscale Roadmap to a Bitcoin ETF
Grayscale’s announcement provides a systematic four-step approach to an ETF, but without a timeline:
- Launch of a private placement. A fund whose shares are only available to wealthier investors, where the initial purchases are controlled by the issuing party.
- Obtaining a listing on the secondary market. Once the purchased shares have completed their blocking period (often 6 to 12 months), they can then be listed on exchanges for the public market. Through this step, the initial buyers cash in on the private placement shares by selling them to a larger investor base. Currently, GBTC, along with its products offering exposure to Ether (ETHE), Litecoin (LTCN), Ethereum Classic (ETCG), and Graysclae Large Scale Composite Fund (GDLC), are trading on OTCQX .
- Beginning of the SEC reporting phase. A decision by the fund issuer to adopt SEC monitoring and reporting requirements to make private placement more transparent than traditional private placements. It also reduces the lock-up period for private placement shares from 12 months to six. Currently only GBTC and ETHE are reporting companies.
- Conversion of funds declared by the SEC into crypto ETFs. Process by which the issuing entity issued ETF shares in exchange for the original private placement shares.
This is a regulated process that cannot be taken for granted. The second of these steps, floating enough stocks in a secondary market such as the OTC Markets OTCQX exchange, can’t quite assume that this will happen automatically, and the liquidity of a fund can help illustrate this point. .
Grayscale indicates that GBTC, which has AUM $ 38.1 billion, is one of the most liquid bitcoin investment products in the world. That said, 98% of GBTC’s shares have never been sold, which means its trading volume is actually much lower than its AUM. Exchanges require healthy trading volumes to list assets, which can be a challenge for smaller market cap crypto assets.
How grayscale tries to cope in the meantime
Grayscale took a few small steps to address the issue, such as allowing parent company Digital Currency Group to buy up to $ 250 million in GBTC shares and announcing its ETF roadmap. It should also be noted that its GBTC product is closed to new investors, which will prevent the issuance of new shares. That said, the shutdown period began in December when the premium was still positive.
Plus, it laid the foundation for one of the biggest expansions ever to its product line. He has filed for registration of dozens of new trusts in Delaware that extend his remit to emerging areas of crypto such as DeFi and privacy coins. Two weeks ago, it also launched five new assets offering exposure: the Basic Attention Token (BAT), LINK, MANA, filecoin and livepeer. Obviously, Grayscale is hoping that it can leverage its credibility, regulators and institutional investors to build significant positions in some of these new assets where there are far fewer ETP competitors.
Will history repeat itself?
It is unclear how the GBTC premium issue will play out, and there is no guarantee that its transition to an ETF will resolve the issue (although ETFs tend to track their net asset value due to trading liquidity. higher). Plus, the industry is still waiting for its premiere. Second, this issue could arise again with other grayscale products with much more distant ETF horizons in the future.
For example, Ethereum is by far the second largest blockchain and product offered by GBTC, and its premium turned negative two weeks ago with less fanfare (it is currently -8.70%). This drop is in some ways more curious because ETHE does not have the same litany of competitors as GBTC. An Ether ETF is much less likely to come to the rescue of this product, let alone the others offered if and when they start to be listed on the stock exchange.