Grayscale sued by Fir Tree for data disclosure as BTC Trust discount nears 50%

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A hedge fund has accused the struggling Grayscale BTC Trust (GBTC) of mismanagement and seeks information on the fiscal health of Grayscale’s owners Digital Currency Group (DCG).

Earlier this week, the Fir Tree family of hedge funds filed a complaint in the state of Delaware against Grayscale Investments and its GBTC trust, citing “serious questions about Grayscale’s mismanagement of the Trust and the troubling reports about liquidity issues within Digital Currency Group and its corporate affiliates.”

Fir Tree believes it possesses “clear and unambiguous information rights” under GBTC’s operative agreement, but Grayscale has “stonewalled” Fir Tree’s demands for answers. Stating that “the age of accountability in digital asset markets is over,” Fir Tree wants to know: “What is Grayscale hiding?”

GBTC was launched in 2013 as a means of providing institutional investors and seasoned deep-pocketed individuals with exposure to BTC without the hassle of personally acquiring and storing BTC. But this year’s sharp downturn in the overall digital asset market has attached lead weights to GBTC’s share price.

The shares have traded at a significant discount to GBTC’s net asset value (NAV) since March 2021, when GBTC’s shares topped $50. The shares closed Thursday at $8.19 after dipping as low as $8.11, reflecting a discount of nearly 50%, a record high (or low, depending on your perspective). Similarly, ugly discounts apply to Grayscale’s other Trusts, including the Ethereum-based Trust, which currently trades at around $6.20, down from nearly $46 in November 2021.

Fir Tree’s complaint cites a YouTube interview with Grayscale’s Head of Investor Relations Rayhaneh Sharif-Askary, in which she acknowledges that Grayscale “drove the discount” to GBTC’s NAV by “flooding the market with supply.” She rationalized that GBTC has been “a victim of its own success.”

Grayscale investors have limited options when it comes to redeeming their Trust shares, in that they can’t unless Grayscale permits it. And Grayscale hasn’t granted such requests for years. Fir Tree cites a 2017 notice to GBTC shareholders that would allow the Trust to “suspend or refuse creation orders and redemption orders for any reason,” a shift that shareholders were told would take place ‘even absent an affirmative vote of a majority of shareholders.’

Meanwhile, Grayscale charges its investors an annual fee of 2% of total assets under management—which reflects the market value of the digital assets rather than the share price of the Trusts—which Fir Tree believes incentivizes Grayscale to go on slowly bleeding hapless shareholders.

DCG boss Barry Silbert recently attempted to reassure DCG investors that all was well, despite the growing number of its investment vehicles teetering on the brink of bankruptcy. Grayscale’s management fees – over $615 million in 2021 alone – are believed to provide as much as 2/3 of DCG’s total revenue, and Fir Tree believes the “troubling reports about liquidity issues” within DCG deserve more public scrutiny.

It’s a family affair

Based on Grayscale’s unwillingness to redeem shares “in the absence of any legal prohibition” against doing so, Fir Tree believes Grayscale is “maintaining this untenable status quo to enrich itself, its management, and its affiliates” at its shareholders’ expense.

Silbert comes under fire for formerly serving as CEO/chairman for both DCG and Grayscale and also serving on Grayscale’s Audit Committee. That committee, along with Grayscale’s board, consists “entirely of insiders,” including three Grayscale C-level execs and DCG’s president. Moreover, Grayscale casually admits that it lacks formal procedures to handle potential conflicts of interest.

Fir Tree accuses GBTC of selling “an immense number of new shares” between 2018 and 2021, partially through a TV ad campaign that was personally promoted over social media by Silbert and Grayscale’s CEO Michael Sonnenshein. Fir Tree claims this #DropGold campaign was targeted at retail investors—to whom GBTC was barred from directly selling—who could purchase GBTC shares on the secondary market.

Fir Tree also makes note of Grayscale’s reliance on a host of DCG-owned or -affiliated entities, including the fact that the roughly 644,000 BTC tokens that make up GBTC are (allegedly) custodied with an offshoot of the Coinbase exchange, in which DCG has a stake. Then there’s Genesis Global, the wholly owned DCG platform that until recently was GBTC’s “sole Authorized Participant, marketer, and distributor.”

Fir Tree says Genesis, the sole entity allowed to issue new GBTC shares, “appears to have loaned billions of dollars of the underlying digital assets … to fund Genesis’ creation of new Grayscale shares.” This led to the $2.3 billion in loans that ‘crypto’ hedge fund Three Arrows Capital (3AC) defaulted on before it declared bankruptcy this spring.

Fir Tree sums up this inbred scenario thusly: “DCG, Genesis, and their affiliates are using the Trust and its outstanding Shares to keep their own finances afloat. They have every financial incentive to block the Trust from instituting a redemption program because the more Shares that remain outstanding, the more collateral that is available to secure the loans they offer to their customers, even if doing so harms Shareholders.”

ETF off

While refusing redemptions, Grayscale began pushing the U.S. Securities and Exchange Commission (SEC) to allow it to convert GBTC into an exchange-traded fund (ETF). The SEC rejected Grayscale’s “wasteful ETF conversion campaign,” prompting Grayscale to appeal, a strategy that Fir Tree claims will cost “years of litigation, millions of dollars in legal fees, countless hours of lost management time, and goodwill with regulators.” In the meantime, GBTC keeps collecting that annual 2% “from the Trust’s dwindling assets.”

Fir Tree counts “many” of its own investors as GBTC shareholders, which Fir Tree believes entitles it to “further investigate Grayscale’s mismanagement of the Trust, [and] evaluate troubling reports about DCG’s and its affiliates’ liquidity issues.” Grayscale has yet to provide a “substantive response” to Fir Tree’s requests for information.

Grayscale publicly responded to Fir Tree’s allegations by claiming that it remains “100% committed to converting GBTC to an ETF, as we strongly believe this is the best long-term product structure for GBTC and its shareholders.”

Observers believe Fir Tree has a good shot at convincing the Delaware court to compel Grayscale to produce the requested information, particularly given the extent of the shenanigans that went unnoticed at so many other companies in this space until it was too late. If that happens, the contagion that continues to sicken major digital asset firms could go even more viral.

Go shorty

In the digital asset community, Fir Tree is perhaps best known for being brave enough to take a short position on Tether’s USDT stablecoin. We say ‘brave’ because Tether skeptics have long argued that betting on USDT losing its 1:1 peg with the U.S. dollar is like playing Russian roulette with six bullets in the revolver.

The prevailing theory is that, in response to a major short position, Tether switches on its ‘money printer’ to pump USDT on certain exchanges just long enough to liquidate your short position. After that, the newly printed USDT—which may or may not have been ‘purchased’ with actual cash—can be returned to Tether, which splits the liquidation profits with the exchanges.

Paolo Ardoino, Tether’s sweaty CTO and one of only two company men who dare speak in public, has occasionally dared individuals to short USDT, displaying the kind of confidence typically reserved for, say, poker players who can see their opponents’ hole cards (which some of Tether’s biggest customers know a thing or two about).

One of the largest recipients of Tether’s USDT stablecoin was Alameda Research, the recently bankrupted market-maker of the recently bankrupted FTX exchange. Both FTX and Alameda were owned by Sam Bankman-Fried, and FTX used to routinely invite people to short Tether.

Ironically, SBF appeared to be shorting Tether shortly before the FTX/Alameda implosion achieved terminal velocity. At the time, SBF denied that he was “doing any of the weird things that I see on Twitter,” but he appears to have been doing whatever he could to generate some sorely needed liquidity, including turning on his former partners in crime.

At least some observers believe Tether may be the real target of Fir Tree’s Grayscale complaint. The alleged strategy is to destabilize already wobbly entities such as Grayscale/DCG in the apparent hope that additional collapses of major digital asset entities will weaken Tether’s role as the grifting grease that keeps the ‘crypto’ wheels in motion. And if Tether falls, the whole rotten edifice will crumble in on itself once and for all. About time, too.

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Ethereum, FTX and Tether—who have co-opted the digital asset revolution and turned the industry into a minefield for naïve (and even experienced) players in the market.