After a month of headlines about its flagship product, the Grayscale Bitcoin Trust (GBTC), trading with a negative premium, the world’s largest crypto exchange-traded product (ETP) provider is fighting back. In a post earlier this week, the global market leader with a little more than 75% of all $61 billion in ETP crypto assets under management announced that it will convert the GBTC in an exchange-traded fund “when permissible,” meaning when the SEC is ready to approve its first bitcoin ETF.
Although Grayscale has been thinking along these lines for a while now, the timing of the announcement could be seen as an acknowledgement that it is feeling competitive pressure from a cacophony of new bitcoin ETF applications, including one from industry heavyweight Fidelity.
Furthermore, there appear to be some signs of investor unrest, with at least one—the activist group Marlton LLC—requesting that Grayscale conduct a modified dutch auction tender offer to help compensate shareholders. I spoke with James Elbaor, managing partner at Marlton LLC, and he made it clear that he holds Grayscale responsible for the negative premium. That said, Grayscale strongly pushed back on the supposition that it executes direct control over the premium and noted that they have no intention of offering such a tender offer. This is a perspective shared by at least one prominent securities lawyer who worked on the very first bitcoin ETF application in the US, Gregory Xethalis, Partner at Chapman and Cutler LLC. He told Forbes in an interview that “under the [GBTC] trust agreement and Delaware law a sponsor [Grayscale] has limited fiduciary duties and maintaining a secondary market share price premium is not one of them”. It is also worth noting that Grayscale’s filing documents state the potential for both positive and negative premiums.
Grayscale’s Roadmap to a Bitcoin ETF
Grayscale’s announcement provides a systematic, four-stage approach to an ETF, albeit without timelines:
- Launching of a private placement. A fund whose shares are only available to wealthier investors, where initial purchases are controlled by the issuing party.
- Obtaining a secondary market quotation. Once purchased shares complete their lockup periods (often 6-12 months), they can then be listed on exchanges for public trading. Through this step initial purchasers cash out of the private placement shares by selling them to a wider base of investors. Currently GBTC, as well as its products offering exposure to ether (ETHE), litecoin (LTCN), ethereum classic (ETCG) and Graysclae’s composite large scale fund (GDLC), trade on OTCQX.
- Starting SEC-reporting stage. A fund issuer decision to adopt SEC oversight and reporting requirements to make the private placement more transparent than typical private placements. This also helps reduce the lockup period for private placement shares from 12 months to six. Currently only GBTC and ETHE are reporting companies.
- Converting SEC-reporting funds into crypto ETFs. The process by which the issuing entity issued ETF shares in exchange for the original private placement shares.
This is a regimented process that cannot be taken for granted. The second of these steps, floating enough shares in a secondary market such as the OTC Markets OTCQX exchange can’t quite be assumed that it will happen automatically, and a fund’s liquidity can help illustrate this point.
Grayscale states that GBTC, which has $38.1 billion AUM, is one of the most liquid bitcoin investment products in the world. That said, 98% of GBTC shares have never been sold, meaning its trading volume is actually much lower than its AUM. Exchanges require healthy trading volumes to list assets, so this can be a challenge for crypto assets with smaller market capitalizations.
How Grayscale Is Trying To Cope In The Interim
Grayscale has taken some small measures to address the problem, such as authorizing parent company Digital Currency Group to purchase up to $250 million worth of GBTC shares along with announcing its ETF roadmap. It is also worth noting that its GBTC product is closed to new investors, which will prevent the issuance of new shares. That said, the closed period began in December, when the premium was still positive.
Additionally, it laid the groundwork for one of the largest ever expansions of its product lineup. It has filed to register dozens of new trusts in Delaware that expand its remit to emerging fields in crypto such as DeFi and privacy coins. Two weeks ago it also launched five new assets that offer exposure: basic attention token (BAT), LINK, MANA, filecoin and livepeer. Clearly, Grayscale hopes that it can leverage its credibility and regulators and institutional investors to build sizable positions in some of these new assets where there are far less ETP competitors.
Will History Repeat Itself?
It is unclear how the GBTC premium issue will play out, and there is no guarantee that transitioning it into an ETF will solve the issue (though ETFs tend to track towards their net asset values due to higher trading liquidity). Plus, the industry is still waiting for its first. Second, this issue could come up again with other Grayscale products with ETF horizons much further off in the future.
For instance, Ethereum is by far the second biggest blockchain and product offered by GBTC, and its premium turned negative two weeks ago to less fanfare (it is currently -8.70%). This drop is in some ways more curious since ETHE does not have the same litany of competitors as GBTC. An Ether ETF is much less likely to come to the rescue for this product, let alone the others offered if and when they start to become publicly traded.