What's going on with Grayscale? The good and the bad.
Updated
The text below is something I wrote about a month ago, deleted from Twitter, then turned into a Twitter Thread, but I had forgotten to share it here on Tradingview. I am putting this out as a basis for my next idea about Bitcoin and Crypto, as it's important to understand the situation of Grayscale fully.
The Good
The Grayscale Bitcoin Trust (GBTC), managed by Grayscale Investments, is one of the primary vehicles for investors to gain exposure to Bitcoin in a regulated environment. However, it's structured as a trust, not an exchange-traded fund (ETF), which has led to some notable price discrepancies between the value of the Bitcoin held by the faith and the market price of GBTC shares.
Grayscale has filed an application with the U.S. Securities and Exchange Commission (SEC) to convert GBTC into a Bitcoin "spot" ETF, which would track the price of Bitcoin directly. However, the SEC has denied these attempts, approving ETFs that follow Bitcoin futures contracts instead, citing fraud and investor protection concerns.
Grayscale has taken legal action against the SEC, arguing that the regulator has been "arbitrary and capricious" in its treatment of Bitcoin-related financial products. It's a significant move that could have broad implications for the future of Bitcoin ETFs in the U.S.
The likelihood of GBTC converting into an ETF largely depends on how the lawsuit unfolds. The case centers on the argument that the SEC has treated similar applications inconsistently, approving futures-based Bitcoin ETFs while rejecting spot-based ones, despite both types of products being susceptible to potential manipulation and fraud.
Grayscale CEO Michael Sonnenshein has expressed optimism about the case, stating that he expects a decision by the end of Q3 2023. Some Bloomberg Intelligence analysts estimate that Grayscale has a 40% chance of winning the lawsuit. Despite this, the outcome is still uncertain.
If Grayscale wins the case, the implications would be significant. GBTC becoming an ETF would be a milestone for the cryptocurrency industry, potentially drawing more mainstream investors into the Bitcoin market. However, it could also lead the SEC to reconsider its previous approval of Bitcoin futures ETFs.
Should Grayscale lose, they have indicated that they would consider appealing to the U.S. Supreme Court, which would prolong the process. Regardless of the outcome, industry observers will closely watch this case, as it could set a precedent for future Bitcoin ETF approvals in the U.S.
Keep in mind even if Grayscale's lawsuit is successful, it would not guarantee immediate approval of a spot Bitcoin ETF. The SEC could still impose certain conditions or requirements to address its concerns about market manipulation and investor protection. The approval process for such a product would likely involve extensive discussions and negotiations between Grayscale and the SEC.
The bad.
Grayscale made a series of mistakes, some of which could be criminal, and they weren't simply 'mistakes' or 'accidents. As explained by David Bailey in this interview (I urge everyone reading this to listen to it) youtube.com/watch?v=KZPE_xro-sI , Grayscale, and DCG attracted lots of investors in the Trust, and although they could help them and let them go, they aren't doing it. To me, it seems like Barry and his gang did actually commit crimes, and they could eventually have to pay for it. As the bad is really bad, especially with the discount of the Trust being so high, shareholders are trying different things to close the discount and get their money back.
The Voice of Activist Shareholders
Activist shareholders, a group comprising hedge funds, asset managers, and retail investors, have not hesitated to voice their dissatisfaction with Grayscale's stewardship of GBTC. Their core contention is that Grayscale's choices have culminated in substantial losses for investors.
David Bailey of BTC Inc and UTXO Management is spearheading this group of disgruntled shareholders. They have vocalized their demands, urging Grayscale to cut its management fee and facilitate investors in exchanging their shares directly for Bitcoin.
The Valkyrie Proposal
Meanwhile, Valkyrie Investments has introduced a bold proposition to seize control of GBTC. The Valkyrie strategy emphasizes bringing liquidity to GBTC, permitting investors to redeem their holdings. Simultaneously, they also expressed intentions to reduce the management fee from 2% to 0.75%.
Valkyrie has already started purchasing shares in GBTC as a part of its strategy. They aim to capitalize on the current "massive discount" of GBTC shares compared to the fund's underlying assets' net asset value (NAV).
The 5 key scenarios
1. If Grayscale wins its case, the discount will close, and DCG will probably become solvent as crypto prices increase. The best thing I could say about Grayscale is that they hold GBTC hostage to solve their other deeper problems and have some leverage for an ETF approval.
2. The Trust is sold or changes management in case DCG goes bankrupt or tries to raise some cash. Maybe they give it to Valkyrie, which stands to benefit a lot from the discount going down.
3. David Bailey and other investors force Grayscale to do some buybacks or redemptions without having to dissolve the entire trust. This could boost the price of GBTC and close the discount to a significant extent.
4. The trust is dissolved (quite unlikely), which has a catastrophic impact on crypto prices. It isn't just GBTC that's the issue, but ETHE too. Having to liquidate those funds directly would be really bad in the short to medium term, although long term, their effect on prices would be inconsequential.
5. As with scenario 4, an unlikely scenario would be DCG not going bankrupt while the SEC wins against Grayscale, but... later in 2024, Biden pushes for a crypto ETF when the SEC has better control over the industry. The discount closes as people speculate on it. My rationale is that Biden would want to win votes and please the crypto industry. Even if he doesn't do it, if DeSantis wins the elections (low chance), he could approve a Bitcoin ETF.
Conclusion
DCG has conducted criminal activity. GBTC holders had to pay the price, and nobody was there to help them. However, the discount has been decreasing as some major players/investors have been trying to improve the situation while benefiting from it themselves.
I see no scenario where the GBTC premium doesn't close within the next 24 months, although I believe it will have closed within the next year. Time is running out for the SEC and DCG; therefore, something will need to happen sooner. Currently, the GBTC discount is at 42%, which means that if it closes in the next 2 years, someone would have made a 70% gain on his BTC (assuming he held GBTC instead of BTC).
The Good
The Grayscale Bitcoin Trust (GBTC), managed by Grayscale Investments, is one of the primary vehicles for investors to gain exposure to Bitcoin in a regulated environment. However, it's structured as a trust, not an exchange-traded fund (ETF), which has led to some notable price discrepancies between the value of the Bitcoin held by the faith and the market price of GBTC shares.
Grayscale has filed an application with the U.S. Securities and Exchange Commission (SEC) to convert GBTC into a Bitcoin "spot" ETF, which would track the price of Bitcoin directly. However, the SEC has denied these attempts, approving ETFs that follow Bitcoin futures contracts instead, citing fraud and investor protection concerns.
Grayscale has taken legal action against the SEC, arguing that the regulator has been "arbitrary and capricious" in its treatment of Bitcoin-related financial products. It's a significant move that could have broad implications for the future of Bitcoin ETFs in the U.S.
The likelihood of GBTC converting into an ETF largely depends on how the lawsuit unfolds. The case centers on the argument that the SEC has treated similar applications inconsistently, approving futures-based Bitcoin ETFs while rejecting spot-based ones, despite both types of products being susceptible to potential manipulation and fraud.
Grayscale CEO Michael Sonnenshein has expressed optimism about the case, stating that he expects a decision by the end of Q3 2023. Some Bloomberg Intelligence analysts estimate that Grayscale has a 40% chance of winning the lawsuit. Despite this, the outcome is still uncertain.
If Grayscale wins the case, the implications would be significant. GBTC becoming an ETF would be a milestone for the cryptocurrency industry, potentially drawing more mainstream investors into the Bitcoin market. However, it could also lead the SEC to reconsider its previous approval of Bitcoin futures ETFs.
Should Grayscale lose, they have indicated that they would consider appealing to the U.S. Supreme Court, which would prolong the process. Regardless of the outcome, industry observers will closely watch this case, as it could set a precedent for future Bitcoin ETF approvals in the U.S.
Keep in mind even if Grayscale's lawsuit is successful, it would not guarantee immediate approval of a spot Bitcoin ETF. The SEC could still impose certain conditions or requirements to address its concerns about market manipulation and investor protection. The approval process for such a product would likely involve extensive discussions and negotiations between Grayscale and the SEC.
The bad.
Grayscale made a series of mistakes, some of which could be criminal, and they weren't simply 'mistakes' or 'accidents. As explained by David Bailey in this interview (I urge everyone reading this to listen to it) youtube.com/watch?v=KZPE_xro-sI , Grayscale, and DCG attracted lots of investors in the Trust, and although they could help them and let them go, they aren't doing it. To me, it seems like Barry and his gang did actually commit crimes, and they could eventually have to pay for it. As the bad is really bad, especially with the discount of the Trust being so high, shareholders are trying different things to close the discount and get their money back.
The Voice of Activist Shareholders
Activist shareholders, a group comprising hedge funds, asset managers, and retail investors, have not hesitated to voice their dissatisfaction with Grayscale's stewardship of GBTC. Their core contention is that Grayscale's choices have culminated in substantial losses for investors.
David Bailey of BTC Inc and UTXO Management is spearheading this group of disgruntled shareholders. They have vocalized their demands, urging Grayscale to cut its management fee and facilitate investors in exchanging their shares directly for Bitcoin.
The Valkyrie Proposal
Meanwhile, Valkyrie Investments has introduced a bold proposition to seize control of GBTC. The Valkyrie strategy emphasizes bringing liquidity to GBTC, permitting investors to redeem their holdings. Simultaneously, they also expressed intentions to reduce the management fee from 2% to 0.75%.
Valkyrie has already started purchasing shares in GBTC as a part of its strategy. They aim to capitalize on the current "massive discount" of GBTC shares compared to the fund's underlying assets' net asset value (NAV).
The 5 key scenarios
1. If Grayscale wins its case, the discount will close, and DCG will probably become solvent as crypto prices increase. The best thing I could say about Grayscale is that they hold GBTC hostage to solve their other deeper problems and have some leverage for an ETF approval.
2. The Trust is sold or changes management in case DCG goes bankrupt or tries to raise some cash. Maybe they give it to Valkyrie, which stands to benefit a lot from the discount going down.
3. David Bailey and other investors force Grayscale to do some buybacks or redemptions without having to dissolve the entire trust. This could boost the price of GBTC and close the discount to a significant extent.
4. The trust is dissolved (quite unlikely), which has a catastrophic impact on crypto prices. It isn't just GBTC that's the issue, but ETHE too. Having to liquidate those funds directly would be really bad in the short to medium term, although long term, their effect on prices would be inconsequential.
5. As with scenario 4, an unlikely scenario would be DCG not going bankrupt while the SEC wins against Grayscale, but... later in 2024, Biden pushes for a crypto ETF when the SEC has better control over the industry. The discount closes as people speculate on it. My rationale is that Biden would want to win votes and please the crypto industry. Even if he doesn't do it, if DeSantis wins the elections (low chance), he could approve a Bitcoin ETF.
Conclusion
DCG has conducted criminal activity. GBTC holders had to pay the price, and nobody was there to help them. However, the discount has been decreasing as some major players/investors have been trying to improve the situation while benefiting from it themselves.
I see no scenario where the GBTC premium doesn't close within the next 24 months, although I believe it will have closed within the next year. Time is running out for the SEC and DCG; therefore, something will need to happen sooner. Currently, the GBTC discount is at 42%, which means that if it closes in the next 2 years, someone would have made a 70% gain on his BTC (assuming he held GBTC instead of BTC).
Note
The discount closed even faster than I anticipated. A key target has been reached, but the market could continue rallying. The premium has gone from -50% down to -10%, and I believe that -10% will close fairly soon. The more it closes, the fewer reasons there are to maintain this position, in case the SEC rejects Grayscale's application, or Grayscale delays converting GBTC into an ETF. Congratulations to everyone who followed this trade.
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