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Although it seems like a lifetime ago, it’s only been two months since Genesis announced the need for a billion-dollar liquidity injection after the FTX and Alameda fallout. As weeks have passed without a resolution, details of the story have become more public and have turned into fraud allegations against Digital Currency Group (DCG) that were announced by Gemini co-founder and chairman Cameron Winklevoss. Gemini is still trying to recover $900 million in assets from Genesis that were used to generate returns for its Earn clients.
Unresolved and only growing, the DCG and Genesis issues weigh heavily on the bitcoin market with many answers needed and several possible outcomes yet to be played out.
The biggest question of all is what will happen to the Grayscale Bitcoin Trust (GBTC) and how these issues will potentially affect the bitcoin price. GBTC has been the vehicle of choice for many to gain regulated exposure to bitcoin and has also been a breeding ground for speculative arbitrage strategies throughout previous swings ranging from a premium to a NAV discount. ). An approved bitcoin point ETF in the United States would probably have solved these problems, but we are still a long way from that happening.
It’s easiest to start with GBTC shares on DCG’s balance sheet, which are estimated to be around 9.67% of the entire supply. In the event that DCG needs to raise cash or goes down the path of Chapter 11 bankruptcy, selling these shares is potentially an option. Selling into a market that is no longer liquid puts more pressure on GBTC’s historically low discount. DCG owns approximately 67 million shares in a market that trades fewer than 4 million shares per day. However, a more important factor is that, by law, DCG can sell no more than 1% of the outstanding shares every quarter. It would take them around 2.5 years of steady sales to sell their entire stake.
Another path, the more likely, is that GBTC, along with other Grayscale trusts, find their way into the hands of a new sponsor and manager. Valkyrie has already proposed to do exactly this:
- Offer an option for investors to redeem shares at NAV via a Regulation M filing (although it is unclear whether the SEC will approve a Regulation M filing).
- Lower rates from 200 basis points to 75.
- Try to offer investors rebates in both cash and spot bitcoins.
The option of a new manager gives investors the opportunity to exit NAV investments.
The GBTC product continues to be a source of revenue for Grayscale and DCG, generating 2% management fees, in perpetuity. Across all the major trust products, Grayscale is raking in more than $300 million this year from administration fees alone. Rather than liquidate the entire trust in the worst case, there will be plenty of buyers willing to take over the vehicle without a commercially available US spot bitcoin ETF.
However, liquidation is not a non-zero possibility. In the event of the insolvency or bankruptcy of Grayscale, voluntary liquidation could be attempted unless 50% of the shares vote to transfer to a new sponsor. There is an advantage to DCG liquidating the trust, as money can be made from closing its shares at NAV, but that will likely result in bitcoins being sold on the open market. Nobody wants 632,000 bitcoins (about 3.3% of the current supply) to become selling pressure in the market. In the unlikely scenario where full liquidation of the trust takes place and USD cash is returned to shareholders, it could be assumed that much of the sale would be absorbed through off-the-shelf deals with interested investors. At this point, this is purely hypothetical.
New information is coming to light that has the potential to change the superstructure regarding the dynamic between Grayscale and shareholders of Grayscale products. We will continue to write about developments in the coming weeks.
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