Grayscale Faces Lawsuit as GBTC Plunges to Record Low 43% Discount

New York-based hedge fund Fir Tree Capital Management has filed a lawsuit against digital asset manager Grayscale Investments over “potential mismanagement and conflicts of interest” at the firm’s flagship Bitcoin fund, according to a Bloomberg report.

The news came as Grayscale Bitcoin Trust’s (GBTC) discount plunged to a record low discount of more than 43% from the underlying Bitcoin value on Tuesday, with Fir Tree alleging that this is partly the result of Grayscale issuing “an immense number” between 2018 and 2021 without providing investors means of exiting their positions aside from selling shares to other investors.

GBTC is a financial vehicle that lets investors gain exposure to Bitcoin without needing to buy and hold the asset physically. The Bitcoin backing GBTC is custodied by crypto exchange Coinbase.

Historically, GBTC has traded at a lofty premium, but things changed in February last year, with the trust’s shares gradually declining to a 40% discount last month.

According to Fir Tree, Grayscale’s redemption bar, which was introduced in 2014, is “self-imposed.” The hedge fund also alleges there’s no legal reason to stop GBTC investors from converting their positions into fiat as long as the trust complies with securities laws.

In its complaint, Fir Tree, which manages $3 billion, said that around 850,000 retail investors had been “harmed by Grayscale’s shareholder-unfriendly actions.”

The complaint, filed in Delaware Chancery Court on Tuesday, is a “books and records” action, meaning it demands documents that could be used to push Grayscale to erase the discount by lowering the annual 2% management fee and resuming redemptions.

Decrypt reached out to both Fir Tree and Grayscale for additional comments.

Grayscale eyes Bitcoin ETF conversion

Fir Tree also looks to stop Grayscale from converting GBTC into a spot Bitcoin exchange-traded fund (ETF), something the Connecticut-based company was actively seeking to achieve since last year.

“That strategy will likely cost years of litigation, millions of dollars in legal fees, countless hours of lost management time, and goodwill with regulators,” Fir Tree’s lawyers said in the complaint. “All the while, Grayscale will continue to collect fees from the trust’s dwindling assets.”

Grayscale, however, insists the firm is not going to give up on those plans.

“We remain 100% committed to converting GBTC to an ETF, as we strongly believe this is the best long-term product structure for GBTC and its shareholders,” a Grayscale spokesperson told Bloomberg in an emailed statement.

All attempts to launch a Bitcoin ETF in the U.S. have been blocked by the Securities and Exchange Commission (SEC), which repeatedly denied or postponed any applications received, including Grayscale’s.

Unimpressed with the agency’s stance on the matter, Grayscale sued the SEC in June.

Additionally, Grayscale hired legal counsel, including Donald B. Verrilli, Jr., former Solicitor General of the United States, and law firm Davis Polk & Wardwell, to support the firm’s ongoing campaign to convert its Bitcoin fund into an SEC-approved ETF.