Crypto fund Grayscale Bitcoin Trust open to tender offer as investors turn up heat

Grayscale Bitcoin Trust may explore a tender offer for up to 20% of its outstanding shares, a sign the digital asset manager could be looking to appease shareholders including three Fir Tree Capital Management funds that sued Grayscale and the trust earlier this month.

In an end-of-year letter to investors Monday, Grayscale Investments CEO Michael Sonnenshein said Grayscale remains "steadfast" in its belief that converting the trust to an exchange-traded fund would be in investors' best interests. Trust shares currently trade at a huge discount to the value of the underlying bitcoin the trust holds.

The lawsuit puts a spotlight on the long-standing cryptocurrency fund, which is a benchmark for the now-troubled industry and counts leading institutional investors among its holders.

The CEO letter cited a lawsuit Grayscale filed against the Securities and Exchange Commission in June after the regulator denied the conversion bid. While Grayscale is confident that the U.S. Court of Appeals for the District of Columbia Circuit will agree with its "compelling" arguments, the letter acknowledged what might happen if Grayscale doesn't prevail.

"If we are not successful in our legal challenge in all applicable courts — and we conclude there is no possibility of legislative or regulatory clarity that would allow for the conversion of GBTC to an ETF within a reasonable timeframe — we would explore other options to return a portion of GBTC's capital to shareholders," the letter said, referring to the trust by its ticker symbol.

Among the options would be the tender offer, which would require both relief from the SEC and shareholder approval, the letter said.

That Grayscale is willing to explore a tender offer is an indication that it's feeling pressure, according to Eric Balchunas, Bloomberg Intelligence senior ETF analyst. Grayscale is perhaps looking to "maybe soothe or throw a bone to the shareholders" to hold them off a bit longer as Grayscale waits for its lawsuit to progress or perhaps for Gary Gensler to be replaced as SEC chairman, Mr. Balchunas said.

"I think they want to buy time until they can get that ETF conversion," the analyst said. "But the fact is they don't want to make everybody whole — that would cost them a lot."

Converting to an ETF, "it's like the perfect solution," Mr. Balchunas, said, adding, however, that "I don't think it's going to happen anytime soon."

Hedge fund manager Fir Tree Capital Management, described by some as a 'vulture' fund and by others as an activist, likely bought shares of the trust at a deep discount to net asset value around the time the three Fir Tree funds issued an information demand to the trust last summer, a person close to the situation said.

Fir Tree had initially asked trust sponsor Grayscale in March to inquire about buying trust shares, the person said. On Dec. 6, the three Fir Tree funds filed their complaint, naming Grayscale and the trust as defendants.

The complaint said plaintiffs have "serious questions" about Grayscale's mismanagement of the trust and "troubling reports" of liquidity issues within Digital Currency Group — Grayscale's parent company — and its corporate affiliates.

On Aug. 3, the plaintiffs sent the trust an information request, the complaint said. That request, also called the "first demand," identified the funds as current trust shareholders.

"So, I think it's fair to assume that they purchased shares of GBTC on the open markets … at or around the time of their first demand letter, which was in August," the person close to the situation said.

Robert Picard, head of alternatives at Hightower's Investment Solutions, and a hedge fund expert, said the lawsuit matches Fir Tree's activist or "event-driven" mandate.

"From their perspective this would fall under their strategy, to become an activist if they feel management haven't performed adequately," Mr. Picard said, adding that through the lawsuit, Fir Tree "can chase value creation, or create an event, to create alpha."

Fir Tree General Counsel Brian Meyer did not respond to a Dec. 13 email seeking information relating to the complaint, including when the Fir Tree funds first became trust shareholders.

Founded in 2013 to allow institutional and accredited individual investors exposure to bitcoin without the challenges and risks of trading and holding it directly, the trust has "gone wildly off the rails," the Fir Tree funds' complaint alleges.

"The trust's purpose was simple: to hold Bitcoin, create shares representing ownership of Bitcoin, and redeem shares in response to shareholders' requests," the complaint said, adding that the trust's investment objective was for its shares to reflect the performance of the market price of bitcoin, minus trust expenses.

Almost a decade later, however, the trust has "utterly failed to achieve its stated objectives," said the complaint, filed in the Delaware Chancery Court.

"In fact, the opposite has occurred," the plaintiffs' complaint alleged. "Grayscale, the trust's sponsor since inception, prohibits investors from redeeming their shares."

Within the past year alone, the trust's share price has "collapsed by 80%," and shares now trade at a 40% to 45% discount to NAV.

"This means that for every dollar of Bitcoin owned by the Trust, its corresponding shares are worth only 55 cents," the court filing said.

That wasn't always the case.

For years, GBTC traded at a premium to NAV when bitcoin and other cryptocurrencies were booming, said James Seyffart, an ETF research analyst with Bloomberg Intelligence.

"The reason (for the premium) was it was the only way to get bitcoin exposure through the traditional financial rails" for institutional investors, Mr. Seyffart said.

Since Jan. 1, GBTC's price has dropped to $8.08 from $34.25, roughly 79% as of Dec. 20. The trust's underlying holding, cryptocurrency bitcoin, has dropped over 60%, down to $16,846.

Grayscale bans redemptions based on a "self-serving pretext" in order to "enrich itself, its management, and its affiliates," the plaintiffs' complaint said.

Grayscale collects a 2% sponsor's fee for administering the trust's day-to-day operations. The fee is calculated by reference to the market value of the trust's bitcoin holdings rather than the market price of the trust's shares, the complaint said.

"As a result, Grayscale has collected hundreds of millions of dollars in excessive fees — siphoning off the trust's assets while failing to do its job," the complaint alleged, adding that in 2021 alone, Grayscale collected $615.42 million in fees from the trust.

To justify refusing redemptions while "cratering its premium," Grayscale began a "new campaign" to convert the trust into an exchange-traded fund, an application the SEC recently rejected, the complaint said.

Grayscale has continued its "wasteful" ETF conversion efforts and is appealing the SEC's decision, a move likely to mean years of litigation and millions of dollars in legal fees, the filing said.

"All the while, Grayscale will continue to collect fees from the Trust's dwindling assets," the Fir Treet funds said.

Fir Tree, described in the complaint as a "non-party," manages more than $3 billion in assets, mainly for large pension plans and government retirement programs.

Listed in the court filing as plaintiffs were the Fir Tree Value Master Fund LP; the Fir Tree Capital Opportunity Master Fund LP; and the Fir Tree Capital Opportunity Master Fund III LP.

"Plaintiffs' ultimate investors are teachers, firefighters, police officers, and other civil servants who provide vital services to American society," filing said.

Shortly after the Fir Tree funds' complaint was filed, a spokesman for the Teacher Retirement System of Texas, Austin, confirmed that it was in invested in the Fir Tree Capital Opportunity Master Fund III LP. Texas TRS had total defined benefit plan assets of $173.3 billion as of Sept. 30.

"TRS has no comment on pending litigation," the TRS spokesman said in a Dec. 9 email.