GBTC Conversion to ETF Still in Limbo, What Options Does Grayscale Have Left?

Grayscale CEO Michael Sonnenshein stated in the year-end investor letter that if the GBTC cannot ultimately be converted into a Bitcoin exchange-traded fund (ETF), they may conduct a tender offer to repurchase 20% of the $10.7 billion trust fund that has been issued. Grayscale mentioned that converting GBTC into an ETF would help align its share price with its potential value. However, they are also prepared for options outside of converting into an ETF.

Summary of Tender Offer

The letter mentioned that Grayscale is considering returning some of GBTC's capital to shareholders through a tender offer, with the expectation that such tender offers will not exceed 20% of the total GBTC shares issued. In order to facilitate this, Grayscale needs approval for the following:

• Applying for an exemption from the SEC to ensure fairness to all investors in the tender offer.
• As the current trust agreement of GBTC does not allow for share redemptions or repurchases, shareholder approval is required for GBTC to conduct such tender offers to modify the existing trust agreement.

If GBTC is able to conduct a tender offer for some GBTC shares, Grayscale will continue to operate GBTC without an ongoing redemption plan until it successfully converts it into a physical Bitcoin ETF.

Liquidating GBTC

Although Grayscale claims to currently have no intention of dissolving GBTC through liquidation, the information revealed in its letter also suggests the difficulty of the tender offer. If the bear market persists and Grayscale's discount situation worsens, liquidation may be the last resort! According to the analysis in the article "White Man" by Arthur Hayes, liquidation will be carried out in the following three scenarios:

• More than 75% of shareholders vote to dissolve the trust: This is a very high threshold, given that Grayscale has disclosed a total of 85,000 investors, rallying so many shareholders is itself challenging. Additionally, Grayscale and its group hold about 10% of the shares, so if Grayscale does not agree to dissolve GBTC, the remaining shareholder threshold would be as high as 83%.
• Grayscale chooses to dissolve the trust: Will Grayscale be willing to give up a cash cow that generates over $200 million annually?
• Applying for an exemption under Regulation M from the SEC

Emphasizing Group Interests do not Affect Grayscale's Operations

Regarding concerns in the market about the debts of Grayscale's parent company DCG and its subsidiary Genesis affecting Grayscale, or using GBTC as an ATM, CEO Sonnenshein also assured in the letter that both companies are not counterparties or service providers for any other products of Grayscale. Grayscale and its products are independent and separate legal entities.

GBTC is solely owned by GBTC and GBTC shareholders. DCG and Genesis are only shareholders and collectively own nearly 10% of the total shares issued; under Section 144 of the 1933 Securities Act, they can only sell a limited number of issued shares to the public market every three months.

As for the progress of the ETF application, Grayscale is currently drafting a response to the SEC, which will be submitted by January 13, 2023, and the final summary will expire on February 3, 2023. After that, a panel of three judges will be selected to hear oral arguments and make a final decision on the case.

Industry Experts' Opinions

We also asked industry experts for their views on Grayscale's actions, and they believe that what Grayscale is trying to do is to test the waters. If only a small percentage of investors, less than 20%, want to redeem, rather than everyone wanting to redeem, this approach may reduce the discount. If it does come to liquidation, the liquidation will be at the last asset value, not selling off physical Bitcoin as mentioned in Arthur Hayes' article, which could eliminate the discount. The possible scenarios of liquidation are not just about the discount; the worst-case scenario could even be zero.