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A group of activist investors in GBTC, the biggest bitcoin investment trust in the world, are planning a takeover. The trust’s steward, Grayscale Investments, is being challenged by an odd coalition of hedge funds, asset managers, and novice investors who claim Grayscale Investments’ administration has cost them billions of dollars.

Since 2015, GBTC has been promoted as a straightforward method for average individuals to purchase bitcoin without having to deal with an exchange, transfer cryptocurrency between wallets, or figure out how to store it securely. A fraction of a bitcoin is added to a pot for each new share issued, tying the value of GBTC shares to the price of bitcoin.

Grayscale portrayed bitcoin as “the future” and the ideal investment for retirees and other investors who “deserve the best” in a series of public service announcements, some of which were broadcast on major US TV networks.

Currently, tens of thousands of novice investors possess GBTC shares.

It means that for every $1 in bitcoin that shareholders own through the trust, they can only get back $0.52 by selling their GBTC shares on the market because the shares, which had consistently traded at a higher price (sometimes even double) than the underlying bitcoin for years, fell to 52% of its value in mid-December. The bargain emptied investors’ wallets of billions of dollars overall.

Investor Christian Galández Beltrán, who asserts to have about $200,000 in bitcoin via the trust, adds,

Investors are in limbo. I’m definitely concerned that I won’t be able to get back all of my money.

A second investor, who asked to remain anonymous for fear of repercussions from the brokerage where he works, claims that he bought about $30,000 worth of bitcoin through GBTC with the intention of protecting himself against inflation as he gets ready to retire. He claims that the trust’s performance has “ill-affected” his marriage, despite the fact that his financial condition has not been significantly impacted. His wife, who “fears the loss is irreversible,” has started calling him a “bitcoin bozo.”

According to David Bailey, founder of BTC Inc. and hedge fund UTXO Management and head of one branch of the organization, thousands of GBTC shareholders have expressed support for the activist effort.

That is what distinguishes this case, according to Bailey.

This item is offered for sale in individual retirement accounts on brokerage platforms. Your parents did this with the intention of diversifying their holdings.

Other GBTC stockholders shared similar experiences. One respondent said that all of their funds were invested in GBTC, while another stated he had taken on extra work to ensure he could support himself in retirement.

Bailey asserts that more than 50 institutions, representing a minimum of 20% of GBTC shares, are also a part of the uprising against Grayscale, some of which have interests in GBTC worth several hundred million dollars. He says he can’t show it, citing investor confidentiality and legal issues, but he gave data on website traffic and form submissions that suggests at least 2,000 investors have contributed to the campaign.

The CEO of Grayscale, Michael Sonnenshein, claims that his company is stagnant. Sonnenshein affirms, “We have absolutely no intention of leaving our position.” “Our work is not over,” says the trust agreement, “and our work would have to be voluntary.”

The activists, however, seem unfazed. Steven McClurg, chief investment officer at asset management company Valkyrie and another driving force behind the movement to topple Grayscale, says, “Our assumption is that, by the pure groundswell of people that want to get out of this thing, pressure is going to be put on.” There are numerous approaches to bring about change. He steadfastly declined to clarify his meaning. This knowledge is referred to by McClurg as “secret sauce.”

Entangled Wires

RedeemGBTC, the organization led by Bailey, is asking Grayscale to lower its 2 percent management charge because it is “predatory” in that it is based on the trust’s bitcoin reserves rather than the share price’s steep discount. The group also requests that Grayscale enable the redemption process as quickly as feasible, which entails investors exchanging their shares for the underlying bitcoin immediately.

According to attorneys for Bailey’s hedge fund, Grayscale has a “perverse motivation” to increase the number of shares in the trust and limit redemptions because of the trust’s fee structure: They contend that the more shares a trust has, the more bitcoin there are in the pot, increasing the revenue from management fees.

This arrangement is referred to by McClurg as a “hostage” situation: Investors are unable to cash out without taking a significant hit to the price of bitcoin.

Grayscale, which asserts that it is doing everything possible to treat its investors fairly, contends that the criteria outlined by Bailey and RedeemGBTC are an unhelpful oversimplification of the reality.

With regard to its campaign to transform the trust into an exchange-traded fund, or ETF, which would enable investors to exchange their shares for the bitcoin in the pot, Grayscale has engaged in legal conflict with the US Securities and Exchange Commission (SEC).

The SEC declared on June 29, 2022, that it would not authorize the conversion of the trust due to concerns about fraud and market manipulation. The decision, which Grayscale claims is “arbitrary and capricious,” has led to a lawsuit against the SEC. On March 7, the two sides are due to present their respective claims to the judge, and Grayscale anticipates that a decision will be made by the end of the summer. The company is optimistic about the possibility of such an ETF entering the market: “It’s a matter of when, not if,” asserts Sonnenshein.

Sonnenshein stated that the funds are best allocated toward the continuing legal struggle with the SEC in a recent interview with cryptocurrency writer Laura Shin, despite the fact that Grayscale might lower its costs in the interim. Grayscale promises to lower its costs right away if the trust is changed into an ETF.

Unhappy investors have also expressed a “significant misunderstanding,” according to Sonnenshein, that Grayscale may ask the SEC to remove them from the regulations that prevent them from cashing out. According to Sonnenshein, conversion to an ETF is the sole way to submit an application for exemption.

Bailey’s attorneys have also asserted that Grayscale might enable investors to withdraw their money without ever having to deal with the SEC. The SEC’s cease and desist letter from 2016 restricted the trust from issuing new shares and allowing stockholders to cash out at the same time, so it’s also not that easy, according to Sonnenshein.

There is potential for arguments of this nature due to the intricacy of the securities regulations that apply to trusts like the GBTC. Andrew Parish, a seasoned cryptocurrency entrepreneur with strong connections to various stakeholders in the sector, describes it as “a spider’s web.” “It’s a tangle that only accountants and attorneys can really understand.”

The ranks of the insurrection have produced a number of potential successors to Grayscale, notably McClurg’s Valkyrie. Along with having a $2.5 million investment in GBTC shares in his hedge fund, Bailey also owns a $113,000 stake in Valkyrie through his various businesses. If Valkyrie were to be successful in its attempt to take over the management of GBTC, it would pay Bailey indirect profits in the hundreds of millions of dollars per year in management fees.

Bailey claims he also stands to lose if Grayscale is pulled out since he owns a stake in DCG, Grayscale’s parent firm, that is worth more than his Valkyrie position. As Bailey explains,

This started because we were upset that our fund had lost some money on its [GBTC] investment, but it turned into something more once we started to hear comments from people about how they had been impacted. People require rapid relief, we discovered.

Sonnenshein claims that Grayscale is always open to hearing from investors, but he is skeptical of the RedeemGBTC campaign’s legitimacy because it is largely managed through Bailey’s personal Twitter account and a straightforward website.

Sonnenshein says, “We always cherish the chance to interact with any of our investors. When compared to the almost 1 million investor accounts we have in the US, it is difficult to take a Twitter account seriously on its own. There is no way to validate anyone’s claim that they own one share or 10 million shares on the platform.

RedeemGBTC is one of many organizations Grayscale must deal with, though. In an effort to compel Grayscale to provide material that could help with an investigation into possible mismanagement and conflicts of interest, investment firm Fir Tree sued Grayscale in December. The claim in the case is that Fir Tree customers who own GBTC shares, many of which are pension funds, have been affected by Grayscale’s “shareholder-unfriendly acts.”

Following this, asset management company Osprey Funds filed a complaint in late January, alleging that Grayscale had made “false and deceptive assertions in its advertising and marketing” that gave investors the impression that GBTC’s conversion into an ETF was “a foregone conclusion.” Osprey asserts that Grayscale’s strategy for advertising has prevented rivals, including itself, from gaining a sizable market share.

Similar to Valkyrie, Osprey has asked Grayscale to resign as sponsor and offered itself in its stead. Osprey CEO Greg King pledged in an open letter to reduce the management charge by 75%, start working right now on a redemption program, and cooperate with authorities rather than resorting to legal action.

Jennifer Rosenthal, vice president of communications at Grayscale, referred to the Fir Tree and Osprey claims as “frivolous” and “baseless,” respectively. “We are fully dedicated to that effort and remain strong in our opinion that the conversion of GBTC to an ETF is the optimal long-term product structure for investors,” she says.

Currently, negotiations between the parties have reached a standstill. Grayscale insists it won’t back down and is still confident in the strength of its case against the SEC, while the activists are at a loss on how to get the company out of business.

According to Parish, as Grayscale seeks to get through this challenging time, the scenario currently threatens to turn into a mud-slinging competition.

In thea meantime, Grayscale are claiming it is not necessarily in their best interests for the conversion to an ETF to happen too quickly because the recent negative press surrounding DCG and its affiliates (the lending unit of one affiliate, Genesis, filed for bankruptcy in January) would probably cause investors to flee the market as soon as possible, taking millions of dollars in management fees with them.

The entire plan here by Grayscale is to restrict redemptions and then engage in massive PR. “And to engage in legal disputes wherever they must,” asserts Parish.

According to Sonnenshein, the “controlled, battle-tested” ETF structure will draw an even larger audience and more capital into bitcoin, refuting the notion that enabling redemptions would result in a consumer exodus. He further claims that turning the trust into an ETF has always been the intention. Investors “deserve and demand this,” he asserts. Sonnenshein claims that the company would pursue a tender offer in which a portion of shareholders would be bought out of their shares at a price determined with “investor fairness” in mind if the courts were to rule against Grayscale and the company had exhausted all available legal avenues of appeal.

RedeemGBTC and Fir Tree, however, disagree with Grayscale’s assessment of the strength of its case against the SEC, characterizing it as “doomed” and “wasteful,” respectively, and stress the necessity of an immediate settlement to the issue. Bailey adds that:

We wouldn’t try to prohibit Grayscale from converting GBTC to an ETF if we believed they would be successful. We just don’t believe it will happen, therefore we need to take action.

Three other shareholders agree that it is doubtful that an ETF will be approved as long as Gary Gensler serves as the SEC’s chair. The tenure of Gensler is set to expire in 2026. The SEC chose not to respond.

It won’t end well for Grayscale, according to McClurg, even though they will dig in and fight to the bitter end. “Providing financial services is a game of confidence; once you lose a client’s trust, it’s impossible to win them back. I believe they are finished in the long run.


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By ndenson

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