Grayscale Bitcoin Trust's "trust wrapper" should protect trust investors from a bankruptcy filing by related entities, an ARK Investment Management analyst said in an interview Jan. 19 prior to a Chapter 11 filing by Genesis, which has the same parent company as the trust's sponsor.
Genesis Global Holdco and two of its lending business subsidiaries, Genesis Global Capital and Genesis Asia Pacific, on Jan. 19 filed voluntary petitions under Chapter 11 in U.S. Bankruptcy Court in New York.
Digital Currency Group is the parent of both Genesis Global Holdco and Grayscale Investments, sponsor of Grayscale Bitcoin Trust. ARK, which was founded in 2014, in 2015 gained its first exposure to bitcoin through the trust, said Yassine Elmandjra, blockchain/cryptoasset analyst at ARK.
"We were the first public fund manager to do so, and this was at a time when bitcoin was nowhere near as mature as it is today," Mr. Elmandjra said.
Today, "GBTC remains really the most liquid product that trades over the counter and that allows for our ETFs and separately managed accounts to gain exposure to bitcoin's price behavior," he said referring to the trust by its ticker symbol.
"So that I'd say is the primary reason why we have exposure to Grayscale," Mr. Elmandjra said, adding that GBTC's grantor trust structure makes ARK "comfortable with the way that our assets are custodied."
According to holdings data available via ARK's website as of Jan. 20, GBTC ranked as the ARK Next Generation Internet ETF's fourth-largest holding. The roughly $954 million fund held about 5.9 million shares of GBTC with a market value totaling about $68 million.
Still, Mr. Elmandjra emphasized that ARK's investment in GBTC is driven by the compelling opportunity bitcoin itself affords.
"To be honest, what we'd like is a (spot) bitcoin ETF … so we're not particularly wed to Grayscale as an entity," he said.
Grayscale is currently suing the Securities and Exchange Commission for denying an application pertaining to GBTC's proposed conversion into a spot bitcoin exchange-traded fund.
Given recent events, "a lot of fear" has been brewing lately, especially as GBTC shares' discount to net asset value has widened, Mr. Elmandjra said. ARK believes that GBTC "is still a largely misunderstood product and much of the fear is unwarranted," he added.
ARK believes GBTC shareholders would be "largely protected" from the implications of a potential bankruptcy filing by DCG or its subsidiaries, Mr. Elmandjra said. While ARK doesn't have any information beyond what's publicly available and Mr. Elmandjra said he couldn't confidently say that Grayscale Investments wouldn't be impacted by a potential DCG or Genesis bankruptcy, he did say that "the trust wrapper should protect investors from a bankruptcy."
Mr. Elmandjra cited several options Grayscale Investments would have in such an event, one of which would be to liquidate GBTC.
"That's something that they would likely want to avoid," Mr. Elmandjra said. "If they weren't to avoid it, then that would result in liquidation of the trust at NAV."
Another option would be a sponsor change from Grayscale to another entity, he said.
"And so, the trust itself would continue to operate and still continue to trade over the counter," Mr. Elmandjra said. "It would just be a different sponsor."
"The likelier, third option at this point is Grayscale doesn't do anything and continues to operate as normal," he added.
In a December letter to investors, Grayscale CEO Michael Sonnenshein said DCG and Genesis Global Capital are not counterparties or service providers for GBTC or any of Grayscale's other products, and consequently don't impact Grayscale products' operations.
"Grayscale and our products, including GBTC, are separate and distinct legal entities — meaning the assets underlying GBTC are owned by GBTC and GBTC shareholders, alone," the CEO's letter said.
In a statement Jan. 20, a Grayscale spokeswoman said it remains "unwaveringly confident" in both the strength of its business and the crypto industry's future.
