the acronym etf – Exchange Traded Fund – laid out in silver letters on rusty crude steel … [+]
After a month of headlines about its flagship product, the Grayscale Bitcoin Trust (GBTC), which is trading at a negative premium, the world’s largest provider of Crypto Exchange Traded Product (ETP) is fighting back. In a post earlier this week, the world leader, with just over 75% of all $ 61 billion in ETP crypto assets under management, announced that it will convert the GBTC into an exchange-traded fund “if allowed”, ie when the SEC is ready to approve its first Bitcoin ETF.
While Grayscale has been thinking along these lines for a while, the timing of the announcement could be seen as confirmation that the company is under competitive pressure from a cacophony of new Bitcoin ETF applications, including one from Fidelity, an industry heavyweight.
GBTC’s premium has continued to decline since its ETF plan was released
Additionally, there appear to be signs of unrest among investors, with at least one – the activist group Marlton LLC – calling on Grayscale to launch a modified takeover bid on Dutch auctions to compensate shareholders. I spoke to James Elbaor, Managing Partner at Marlton LLC, and he made it clear that he blames grayscale for the negative premium. Even so, Grayscale has strongly pushed back the assumption that it has direct control over the premium and has stated that it has no intention of making such a takeover bid. This is a perspective shared by at least one prominent securities attorney who worked on the very first Bitcoin ETF application in the U.S., Gregory Xethalis, partner at Chapman and Cutler LLC. He told Forbes in an interview that “under the [GBTC] Trust Agreement and Delaware Law a Sponsor [Grayscale] has limited fiduciary duties and does not include maintaining a price premium for the secondary market share. “It’s also worth noting that Grayscale’s filing indicated the potential for positive and negative rewards.
Grayscale roadmap to a Bitcoin ETF
Grayscale’s announcement offers a systematic, four-step approach to an ETF, but with no timeframe:
- Start of a private placement. A fund whose shares are only available to wealthier investors whose initial purchases are controlled by the issuing party.
- Receipt of a secondary market offer. As soon as purchased shares have completed their blocking period (often 6-12 months), they can be listed on the stock exchanges for public trading. By taking this move, first-time buyers will benefit from the private placement stocks by selling them to a wider base of investors. Currently, GBTC and its products, which offer exposure to Ether (ETHE), Litecoin (LTCN), Ethereum Classic (ETCG) and Graysclaes Composite Large Scale Fund (GDLC), are traded on OTCQX.
- Start the SEC reporting phase. A decision by the fund issuer to assume the regulatory and reporting obligations of the SEC in order to make the private placement more transparent than typical private placements. This also helps to shorten the lock-up period for private placement shares from 12 to six months. Only GBTC and ETHE companies are currently reporting.
- Conversion of SEC reporting funds into crypto ETFs. The process by which the issuing company issued ETF shares in exchange for the original private placement shares.
This is a regulated process that cannot be taken for granted. The second of these steps, which involves listing enough shares on a secondary market such as the OTC Markets OTCQX exchange, cannot be entirely assumed to be automatic, and a fund’s liquidity can illustrate this point.
According to Grayscale, GBTC is one of the most liquid Bitcoin investment products in the world, with an AUM of $ 38.1 billion. However, 98% of GBTC shares have never been sold, which means that the trading volume is actually much lower than the AUM. Exchanges require healthy trading volume to list assets. This can therefore be a challenge for crypto assets with a smaller market capitalization.
How grayscale try to finish in the meantime
Grayscale has taken some small steps to address the issue, such as approving parent company Digital Currency Group to purchase GBTC shares worth up to $ 250 million, as well as announcing their ETF roadmap. It’s also worth noting that its GBTC product is closed to new investors, which will prevent new shares from being issued. However, the lock-up period started in December when the premium was still positive.
In addition, it laid the foundation for one of the largest expansions of its product range. It has filed for registration of dozens of new trusts in Delaware that are expanding their scope to include emerging crypto fields like DeFi and privacy coins. Two weeks ago, five new assets were also launched that offer engagement: BAT (Basic Attention Token), LINK, MANA, Filecoin and Livepeer. Grayscale clearly hopes it can use its credibility and its regulators and institutional investors to build sizeable positions in some of these new assets where there are far fewer ETP competitors.
Will history repeat itself?
It is unclear how the GBTC premium issue will perform, and there is no guarantee that converting to an ETF will solve the problem (although ETFs tend to tend towards their net asset values due to higher trading liquidity). Plus, the industry is still waiting for its first. Second, this problem could also occur in the future with other grayscale products with an ETF horizon.
For example, Ethereum is by far the second largest blockchain and product offered by GBTC, and its premium went negative two weeks ago, which means less fanfare (currently -8.70%). That drop is stranger in some ways, given that ETHE doesn’t have the same litany of competitors as GBTC. An Ether ETF for this product is much less likely to come to the rescue, let alone the others that are offered when they go public.