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It seems like a lifetime ago that Genesis announced they needed a $1 billion liquidity injection to help them through the aftermath of Alameda and FTX. As weeks passed without any resolution, the details of this story became more public. Cameron Winklevoss (Gemini co-founder) announced fraud allegations against Digital Currency Group. Gemini is still trying for $900 million to be recovered from Genesis. These assets were used to generate income for their Earn customers.
The Genesis and DCG problems, which are still unresolved, have a significant impact on the bitcoin market. There are many possible outcomes and many questions that need to be answered.
The biggest question is how the Grayscale Bitcoin Trust will be affected and what impact this will have on the bitcoin price. GBTC is the preferred vehicle for many who want to have regulated bitcoin exposure. It has also been a fertile ground for speculative arbitration strategies throughout the previous swings that saw net asset values (NAV) drop from a premium and rise to a discount. An approved bitcoin spot ETF in the United States would have likely solved these issues, but we’re still far from that happening.
It’s easiest to start with the GBTC shares on DCG’s balance sheet which are estimated to be around 9.67% The entire supply. These shares can be sold if DCG is in need of cash or goes through Chapter 11 bankruptcy. Selling shares in an already illiquid market places more pressure on historically low GBTC discounts. DCG holds approximately 67% million shares in a market that trades less frequently than 4 million shares per day. DCG is allowed to trade in the market if it is required by law. sell no more than 1% of shares outstanding every quarter. They would need to sell their entire stake in 2.5 years.
Another path — the most likely one — is that the GBTC, along with Grayscale’s other trusts, find their way into the hands of a new sponsor and manager. Valkyrie has already proposed Do exactly this:
- Give an option for investors to redeem shares at NAV through a Regulation M filing request (although it’s not clear a Regulation M request would get approved by the SEC).
- Lower fees starting at 200 basis points and ending at 75.
- Investors may be offered redemptions in cash or spot bitcoin.
Investors have the option to choose a new manager, which allows them to exit investments at NAV.
The GBTC product is still a cash cow for Grayscale and DCG, raking in 2% management fees — in perpetuity. Grayscale has collected over $300 million in management fees this year for all major trust products. The best case scenario is to liquidate the entire trust. However, there will be many willing buyers who will take over management of the vehicle if there is no U.S. spot cryptocurrency ETF available.
But liquidation is still possible. Insolvency or bankruptcy under Grayscale is possible voluntarily liquidation could be pursued Unless 50% of shares vote to transfer, it is not possible to do so. There is upside to DCG liquidating the trust as there’s money to be made from their shares closing to NAV, but that likely results in selling bitcoin on the open market. No one wants to see 632,000 bitcoin — approximately 3.3% of current supply — become selling pressure in the market. One could assume that OTC deals with interested investors would absorb a lot of the selling in the unlikely event of a total liquidation of the trust. This is only a hypothetical scenario.
New information is emerging that could change the superstructure of Grayscale’s relationship with shareholders of Grayscale products. In the coming weeks, we will continue to report on developments.
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