Approval of Bitcoin ETF may trigger the withdrawal of $1 billion in funds from Grayscale’s GBTC.

Approval of Bitcoin ETF may trigger $1 billion withdrawal from Grayscale's GBTC.

Author: Adam Morgan McCarthy, translated by: Shanooba, LianGuai

• Grayscale is considering converting its flagship fund into a Bitcoin spot ETF, which could lead to billions of dollars in redemption demand.

• FTX and Genesis creditors are eager for repayment, and the $1.1 billion locked in GBTC holdings could be crucial in alleviating the demand.

Crypto investors who have suffered a tough year in the industry will be looking to spot Bitcoin exchange-traded funds (ETFs) for hope. BlackRock, Fidelity, and Ark Invest are all targeting this goal. Grayscale recently won against the U.S. Securities and Exchange Commission in court, and experts and analysts say that a Bitcoin ETF is closer than ever before.

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However, despite the giants waiting for approval from the U.S. Securities and Exchange Commission, bankruptcy and defaulted loans pose a survival threat to the largest cryptocurrency fund, the Grayscale Bitcoin Trust (GBTC). GBTC manages around $16 billion in assets, and some investors are requesting refunds. Outflows and liquidation could lead to a capital flight from this behemoth, negating the positive news of a spot Bitcoin ETF gaining approval in the short term.

If GBTC redeems up to 20% of the assets it manages after approval, over $1.5 billion worth of Bitcoin could enter the market or be reallocated to other asset management companies like Cathie Wood’s Ark Invest. Wood’s fund has invested over $100 million in GBTC shares and has invested $88 million through its Ark Next Generation ETF.

Potential payday for creditors

Grayscale’s proposal to convert its GBTC Trust into a spot ETF could bring considerable benefits to high-profile bankrupt companies’ creditors, such as FTX and Genesis. Many GBTC investors seem eager to profit from their shares. FTX creditors and Grayscale’s parent company, Digital Money Group, hold shares worth about $1.1 billion that can be used to pay creditors and defaulted loans.

The FTX Creditors Committee has filed a lawsuit against the asset management company in an attempt to recover funds locked in the trust. According to court documents, as of August 31, FTX’s total investment amounted to $417 million. DCG holds nearly $700 million worth of GBTC shares. Last week, DCG was sued by its subsidiary Genesis for allegedly failing to repay loans totaling over $620 million.

Although DCG is selling its media division CoinDesk, the value of this sale seems to be slightly over $100 million, meaning it still provides the best opportunity for creditors seeking payment.

Bid quotes

Hedge fund Fir Tree Capital abandoned some claims in July but has not given up concerns about redemptions. Its proposal could also benefit DCG.

The company stated, “Grayscale has repeatedly rejected Fir Tree’s proposal to allow redemption of issued GBTC shares so that shareholders can recoup part of their investment,” and added that this would be the “easiest solution for shareholders to recoup billions of dollars’ worth of GBTC.” DCG and its affiliates have successfully eliminated these viruses.”

Fir Tree proposed a tender offer for Grayscale to “unlock value for investors.” The hedge fund stated that its proposal would provide Grayscale with a mechanism to address investor concerns and potentially reduce the difference between the market price of GBTC shares and their net asset value.

The trading price of GBTC shares is lower than the value of the underlying Bitcoin it holds because the fund cannot create or destroy shares, and there is insufficient demand for the shares on the secondary market, with a trading price of around $19 compared to the secondary market trading price of $23. A tender offer can serve as a way for investment trusts like GBTC to manage their share price and provide liquidity for shareholders looking to exit their positions.

Fir Tree stated that its proposed tender offer timetable could bring $3.6 billion in direct value to participating GBTC shareholders and $230 million in direct value to DCG, which could be used to help repay its debt to Genesis. Approval of an ETF could eliminate the need for such tender offers and potentially bring more value to GBTC investors needing to repay debt. Given recent trading activity, the hedge fund seems optimistic about approval.

Fir Tree bet $60 million on Grayscale in the fourth quarter of 2022, purchasing GBTC and betting that the discount to net asset value would narrow. Sources told Bloomberg that the hedge fund made a 40% profit in this transaction, indicating that the company believes there is significant upside potential for the conversion of Grayscale funds into spot products, allowing it to exit its positions correctly.

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