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Grayscale’s parent business Digital Currency Group, the Bitcoin Trust (GBTC), and other stakeholders are continuing to put pressure on it. Additionally, two new players, Valkyrie Investments and Fir Tree, have entered the “Shakespearean drama,” as Ram Ahluwalia, CEO and co-founder of cryptocurrency-native investment advisor Lumida, noted in a recent thread.

Particularly the second’s motivation is up for debate. With around $3 billion in assets under management (AUM) and thousands of holdings, Fir Tree is a hedge fund. According to SEC 13F filings, Fir Tree owns numerous other securities, including First Citizen’s Bank, KKR, and Comcast. They also have significant investments in tobacco and oil.

Therefore, Ahluwalia questions why Fir Tree, a value investor, has a stake in GBTC and sued Grayscale in the first week of December since the hedge fund only owns a small amount of GBTC.

In order to compel changes to the way the business runs its flagship Bitcoin Trust, Fir Tree Capital Management filed the case.

The complaint demands that Grayscale reduce its fees, start redemptions, and make available records pertaining to its business dealings with Digital Currency Group. Furthermore, Fir Tree also aims to thwart Grayscale’s attempts to turn its Grayscale Bitcoin Trust (GBTC) into a spot ETF (ETF).

A Significant Short on Tether, Bitcoin, and Crypto?

Ahluwalia speculates that the lawsuit’s arguments do not accurately reflect the parties’ genuine intentions. The “end investors,” who include “teachers, firefighters, police officers, and other public employees,” according to Fir Tree, are what drive GBTC.

“This is part of a wider tale…Be wary,” advises Ahluwalia, adding that “Fir Tree is pushing on all the softpoints it can discover while increasing its bet against the cryptocurrency ecosystem (USDT, Bitcoin, etc.).”

The Chartered Financial Analyst (CFA) makes reference to this in light of Bloomberg’s disclosure that Fir Tree had a sizable short position on Tether (USDT) in March 2022. By March 2023, Fir Tree expects the USD/USDT peg to break, in part due to a “bank run.”

The official justification for the trade is that “much” of the commercial paper backing the token is tied to Chinese real estate developers, some of which are having financial difficulties. As a result, the position has been structured as a “asymmetric trade,” meaning that downside risk is low and potential reward is high.

Furthermore, according to the analyst, Fir Tree has pinpointed three “softpoints” of the Bitcoin and cryptocurrency market that it can shake: Grayscale, the USDT bond, and Binance. However, Ahluwalia claims that Fir Tree is powerless to influence the exchange. Fortunately, I don’t see a viable road to Grayscale Trust unwinding, the analyst writes on GBTC. The Trust is a cash cow and can get a private appraisal based just on cashflows from a third party. Fir Tree is putting pressure on the stool’s slack legs.

With the lawsuit, Fir Tree may be attempting to lessen the likelihood that DCG will raise outside funding while its own wager still has around three months to go. Whether the hedge fund is also short Bitcoin or has OTM puts on BTC is likewise unclear from the 13F filings.

My Enemy’s Enemy Is My Friend

Even with “heroic” intentions, Valkyrie’s proposal to manage GBTC and lower fees from 2% to 75 basis points does not make the issue any simpler. Valkyrie would also employ Reg M. Both would reduce the value of Grayscale.

“In my view, Fir Tree is seeking to reduce the likelihood of a VC round and push DCG to the brink. […] Strange bedfellows are Fir Tree and Valkyrie. Fir Tree is taking the side of Tether. For owners of Bitcoin/GBTC, Valkyrie is positioned as the hero. Ahluwalia calls this a “my enemy’s enemy is my friend” dynamic.

The unsolved situation around DCG and Grayscale thus continues to be one of the major possible threats for additional crypto-intrinsic market unrest for Bitcoin investors.

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