Activist investor says Grayscale's Bitcoin ETF pledge is not enough

Grayscale needs to turn its Bitcoin Trust into an ETF to remain competitive.

Grayscale says it’s committed to converting its $38 billion Bitcoin trust (GBTC) into an Exchange Traded Fund (ETF).

In a blog post, Grayscale said it always meant to morph GBTC into an ETF, and it intends for all of its crypto trusts to eventually follow suit.

Grayscale says regulatory roadblocks have kept it — the world’s largest crypto fund — from applying to evolve GBTC into an ETF.

However, the fund now appears ready to try again. Grayscale even filed a copy of its blog post with the SEC in an 8-K form.

Companies use these forms to notify investors of major events that could impact their share price.

The pre-ETF Grayscale pitch

GBTC is a closed-ended fund, which means it operates similarly to a company that’s undergone an IPO.

Grayscale allows accredited and institutional investors to pledge at least $50,000 in return for GBTC stock.

Grayscale takes that money, buys Bitcoin with it, and stores it in a trust.
The fund collects a 2% annual fee for maintaining the BTC stash for shareholders.
GBTC holds about 655,000 BTC, according to Bitcoin Treasuries.

GBTC represents by far the world’s biggest Bitcoin treasury.

GBTC investors can offload their shares on the secondary market after a six-month lockup period. There’s no way to redeem GBTC shares for Bitcoin, so investors can only cash out by selling their stock.

So, GBTC’s pitch for the retail crowd goes that it allows long-term, generalized Bitcoin exposure in 401(k)s and Roth IRAs, as those portfolios can hold GBTC shares but not raw Bitcoin.

As of Q3 2020, an overwhelming majority (96%) of Grayscale’s investments were made by those classified as institutional or accredited (mostly hedge funds).

Much like a company’s stock, GBTC derives its value from market demand. This means it’s possible for GBTC shares to trade at a premium (or a discount) compared to the value of the assets held by the trust (its Net Asset Value, or NAV).

Historically, GBTC shares have sold at a premium. When that happens, buyers effectively pay extra for their Bitcoin at the benefit of sellers.

GBTC demand was so high last December that its premium hit nearly 40%. Investors had clamored to buy regulated exposure to Bitcoin’s surging price as it broke records for the first time in three years.

GBTC has underperformed against Bitcoin… but that’s nothing compared Grayscale’s Ethereum trust (ETHE).

But unlike ETFs — which are generally open-ended — Grayscale never destroys GBTC shares. When demand dries up, GBTC supply can simply be too great and the premium flips to a discount.

This activist investor is unimpressed with the ETF plan

More recently, GBTC stock trades well under the fund’s NAV, at its worst in late March nearly 15% below.

This suggests interest in Grayscale’s flagship trust has waned as investors eye fresh Bitcoin ETFs on Canadian stock exchanges.

These ETFs are readily available to US investors and threaten to render GBTC obsolete, as their stock typically trades within a few percentage points of their NAVs.

In fact, shareholding activist family office Marlton LLC has demanded Grayscale do more to boost share prices, and noted that Grayscale’s buyback schemes and ETF plan aren’t going far enough.

GBTC’s premium recently turned to a discount — the first time it’s done so in history.

Marlton lead James Elbaor says GBTC’s underperformance represents $3.1 billion in shareholder losses, telling Bloomberg:

“We are frustrated that the board might allow management to squander the company’s leading market share to the detriment of GBTC stockholders, whilst simultaneously rewarding yourselves handsomely with a profligate, market-leading, 2% management fee.”

“Marlton and other stockholders will not tolerate such clear destruction of stockholder value,” Elbaor added.

Ready to try again

In Grayscale’s blog, the fund noted it already applied to launch a Bitcoin ETF way back in 2016.

Grayscale says it withdrew the application as it believed the regulatory environment for digital assets kept the SEC from approving its bid.

Canadian Bitcoin ETFs are returning more for investors than GBTC.

Protos asked Grayscale chief exec Michael Sonnenshein whether the rise of Canadian Bitcoin ETFs triggered Grayscale into lodging its intent, some five years later.

“We believe that in the current development of the crypto market, all new entrants are positive signs for the industry as they’re providing more access points to bring new investors to the asset class,” wrote Sonnenshein in an email.

Sonnenshein then re-affirmed Grayscale’s commitment to working closely with the SEC regulators to greenlight a Bitcoin ETF for US markets.