Grayscale considers converting its flagship fund into a Bitcoin spot ETF, which could lead to billions of dollars in redemptions.
Creditors of FTX and Genesis are desperate to be repaid, and a combined $1.1 billion in shares locked in GBTC could be key to easing demand.

Cryptocurrency investors battered by a brutal year for the industry are pinning their hopes on spot Bitcoin exchange-traded funds. BlackRock, Fidelity and Ark Invest are all targeting this. Grayscale recently won a court victory against the SEC, and experts and analysts say a Bitcoin ETF is closer than ever.

However, while the giants await SEC approval, bankruptcies and loan defaults pose an existential threat to the cryptocurrency’s largest fund, the Grayscale Bitcoin Trust. GBTC manages about $16 billion in assets, and some investors are demanding refunds. Outflows and liquidation could cause funds to flee the behemoth, negating the positive news of a spot Bitcoin ETF being approved in the near term.

If GBTC were to conduct redemptions of up to 20% of the assets it manages upon approval, more than $1.5 billion worth of Bitcoin would enter the market or be reallocated to other asset managers such as Cathie Wood’s Ark Invest. Wood’s fund has invested more than $100 million in GBTC shares and $88 million through its Ark Next Generation ETF.

Potential payday for creditors

Grayscale is proposing to convert its GBTC trust into a spot ETF, which would bring huge benefits to creditors of high-profile bankrupt companies such as FTX and Genesis. Many GBTC investors seem eager to profit from their shares. There is about $1.1 billion worth of stock between FTX creditors and Grayscale parent company Digital Money Group, which can be used to pay creditors and defaulted loans.

FTX’s committee of creditors filed suit against the asset manager in an attempt to recover funds locked in the trust. FTX’s investments totaled $417 million as of August 31, according to court documents. DCG holds nearly $700 million in GBTC shares. Last week, DCG was sued by its subsidiary Genesis over $620 million in unpaid loans.

While DCG is selling its media unit CoinDesk, the sale appears to be worth just over $100 million, meaning its holdings of GBTC stock still offer the best chance for creditors seeking payment.

Bidding

Hedge fund Fir Tree Capital backed away from some of its claims in July but not its concerns about redemptions. Its proposals could also benefit the DCG.

“Grayscale has repeatedly rejected Fir Tree’s proposals to allow redemption of outstanding GBTC shares so that shareholders can recoup a portion of their investment,” the company said, adding that it would be “billions of dollars in value of GBTC that shareholders can recoup.” The simplest solution” DCG and its affiliates have successfully eliminated these viruses. "

Fir Tree recommended that Grayscale conduct a tender offer to “unlock value for investors.” The hedge fund said its proposal would provide Grayscale with a mechanism to address investor concerns and potentially reduce the difference between the market price of GBTC shares and its net asset value.

GBTC stock trades at a discount to the value of the underlying Bitcoin it holds because the fund cannot create or destroy shares and there is insufficient demand for the shares on the secondary market, where it trades at around $19, compared with The transaction price was $23. primary market. Tender offers can be a way for investment trusts such as GBTC to manage their share prices and provide liquidity to shareholders who want to exit their positions.

Fir Tree said its proposed tender offer schedule could generate $3.6 billion in direct value for participating GBTC shareholders and $230 million for DCG, which it said could be used to help repay its debt to Genesis. . Approval of the ETF may eliminate the need for such tender offers and may bring more value to GBTC investors who need to repay their debt. The hedge fund appears optimistic about approval given recent trade activity.

Fir Tree made a $60 million bet on Grayscale in the fourth quarter of 2022, buying GBTC and betting that the discount to net asset value would narrow. Sources told Bloomberg that the hedge fund made a 40% profit on the transaction. This suggests that the firm sees significant upside in Grayscale funds converting into spot products, which would allow it to properly exit its positions.

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