Bitcoin investors are planning a major coup

Since 2015, GBTC has been marketed as an easy way for regular people to invest in bitcoin without having to deal with an exchange, send crypto between wallets, or figure out how to store it safely. The value of GBTC shares is tied to the price of bitcoin: for each new share created, a fraction of a bitcoin is added to a pot, anchoring its value.

In a series of advertisements aimed at the general public, some of which aired on major American television networks, Grayscale described bitcoin as “the future” and the ideal investment for retirees and other investors who “deserve the best”. Now GBTC shares are owned by hundreds of thousands of amateur investors.

At the start of 2021, the stock, which had consistently traded at a higher price (sometimes even double) than the underlying bitcoin for years, fell to 52 percent of the value of bitcoin in mid-December, meaning that for every $1 in bitcoin that shareholders own through the trust, they can only reclaim $0.52 by selling their GBTC shares on the market. Altogether, the rebate created a multibillion-dollar hole in investors’ pockets.

“Investors are in limbo,” says Christian Galíndez Beltrán, a shareholder who claims to have about $200,000 in bitcoin via the trust. “I’m really worried about not being able to redeem all my money.”

Another investor, who asked not to be named for fear of repercussions from the brokerage he works for, says he bought about $30,000 worth of bitcoin through GBTC with the goal of hedging against inflation as he prepares for retirement. Although his financial situation has not been so seriously damaged, he says that the performance of the trust has “badly affected” his marriage; his wife, who “fears the loss is permanent,” has taken to calling him a “bitcoin bozo.”

Thousands of GBTC shareholders like these have registered their support for the activist campaign, according to David Bailey, founder of BTC Inc and hedge fund UTXO Management, and leader of part of the movement.

“That’s what makes this a unique situation,” says Bailey. “This product is sold on brokerage platforms in individual retirement accounts. This is your mom and dad who think they are diversifying their portfolio.”

WIRED spoke to six GBTC shareholders, all of whom told similar stories. One person said they have all their savings tied up in GBTC, while another has taken on extra work to ensure he is able to support himself until retirement.

Bailey claims that more than 50 institutions, some of which have several hundred million dollar stakes in GBTC, are also involved in the uproar to oust Grayscale, and in total represent at least 20 percent of GBTC shares. He claims to be unable to provide evidence, citing investor privacy and legal concerns, but provided WIRED with web traffic and form submission data suggesting at least 2,000 investors have joined the campaign.

Michael Sonnenshein, Grayscale CEO, says his company isn’t going anywhere. “We have absolutely no intention of stepping down from our role,” says Sonnenshein. “Our trust agreement explicitly states that we must voluntarily withdraw – and our work is not done.”

But the activists are undisturbed. “Our expectation is that, for the sheer reason of people wanting to get out of this thing, it’s going to be put under pressure,” said Steven McClurg, chief investment officer at asset management firm Valkyrie, another leader of the campaign to oust. Grayscale. “There are many ways to affect change.” He refused to elaborate on what he meant. McClurg describes this information as “secret sauce.”

Crossed wires

The group led by Bailey, called RedeemGBTC, wants Grayscale to reduce its 2 percent management fee, which it describes as “predatory” because it is calculated against the trust’s bitcoin reserves, not the price of the deeply discounted shares. The group also wants Grayscale to allow investors to exchange their shares directly for the underlying bitcoin – in a process known as redemption – as soon as possible.

The nature of the trust’s fee structure, lawyers representing Bailey’s hedge fund have argued, creates a “perverse incentive” for Grayscale to maximize the number of shares in the trust and limit redemptions: They argue that the greater the number of shares in the trust, the larger the pot of bitcoin, which increases the income generated by management fees.

McClurg describes this arrangement as a “hostage” situation: Investors cannot exit without absorbing a large decline in the price of bitcoin.

However, the claims outlined by Bailey and RedeemGBTC are an unhelpful oversimplification of the situation, suggests Grayscale, which claims to be doing everything in its power to do right by its investors.

Indeed, Grayscale has entered into a legal battle with the US Securities and Exchange Commission (SEC) over its campaign to convert the trust into an exchange-traded fund, or ETF, which would allow investors to cash in their shares for bitcoin in the pot.

On June 29, 2022, the SEC announced that it would not grant permission to convert the trust, citing fraud and market manipulation. Grayscale has sued the SEC over the decision, which it calls “arbitrary and capricious.” The two parties are scheduled to present their respective cases to a judge on March 7, and Grayscale expects a final decision to be made by the fall. The firm is optimistic about the prospect of such an ETF coming to market: “It’s a matter of when, not if,” says Sonnenshein.

Although Grayscale could reduce its fees in the meantime, Sonnenshein argued in a recent interview with crypto journalist Laura Shin that the funds are best directed toward the ongoing legal battle with the SEC. Once the trust is converted to an ETF, Grayscale promises to reduce fees immediately.

There’s also been a “meaningful misunderstanding,” Sonnenshein tells WIRED, among frustrated investors who say Grayscale may apply to the SEC for exemptions from rules barring them from cashing out. The only way to apply for an exemption, says Sonnenshein, is to pursue conversion to an ETF.

Bailey’s lawyers have also argued that Grayscale could allow investors to withdraw money without dealing with the SEC at all. But it’s not that simple either, Sonnenshein says, because of a cease-and-desist letter issued by the SEC in 2016 that prevented the trust from issuing new shares and allowed shareholders to cash out at the same time.

The complexity of the securities laws applicable to trusts such as GBTC creates the potential for disputes of this nature. “It’s a spider’s web,” says Andrew Parish, an experienced crypto entrepreneur with close ties to parties in the industry. “It’s a mess that can barely be understood by anyone but accountants and lawyers.”

Pretenders to the Throne

Contenders to take over from Grayscale have emerged from the ranks of the Rebellion, including McClurg’s Valkyrie. Bailey also has skin in the game: not only does his hedge fund have $2.5 million in GBTC shares, but his companies also have a combined $113,000 stake in Valkyrie. If Valkyrie were to succeed in its bid to assume management of GBTC, it would absorb hundreds of millions of dollars in annual management fees, and Bailey would profit indirectly.

But Bailey also says he has a stake in DCG, Grayscale’s parent company, which is greater in value than his Valkyrie position, so he also stands to lose if Grayscale is forced out. “This started because we were frustrated that our fund had lost some money on it [GBTC] investment,” says Bailey, “But when we started getting comments from people about how they had been affected, it became something else. [We realized that] people need immediate relief.”

While Sonnenshein says Grayscale is always willing to hear from investors, he has reservations about the credibility of the RedeemGBTC campaign, which is run almost entirely through Bailey’s personal Twitter account and a simple website.

“We always appreciate the opportunity to engage with all of our investors,” says Sonnenshein. “[But] it’s hard to take a Twitter account seriously as a stand-alone, compared to the nearly 1 million investor accounts we have across the U.S. … Anyone can go to the site and say they have one share or 10 million shares—and there’s no confirmation of that. “

But RedeemGBTC isn’t the only group Grayscale has to contend with. In December, investment firm Fir Tree filed a lawsuit against Grayscale in an attempt to compel the firm to hand over information that could help in an investigation into potential mismanagement and conflicts of interest. The lawsuit alleges that Grayscale’s “shareholder-unfriendly actions” have harmed Fir Tree clients who hold GBTC shares, many of which are pension funds.

This was followed in late January by a lawsuit filed by asset management firm Osprey Funds that claimed Grayscale made “false and misleading statements in its advertising and marketing” that gave investors the impression that GBTC’s conversion to an ETF was a “foregone conclusion.” ” Osprey also claims that Grayscale’s approach to advertising has made it impossible for competitors, including itself, to gain meaningful market share.

Like the Valkyrie, Osprey has called on Grayscale to withdraw as a sponsor and come forward as a replacement. In an open letter, Osprey CEO Greg King pledged to cut the management fee by 75 percent, seek to immediately implement a redemption program and cooperate with regulators rather than pursue litigation.

The Gran Tree and Osprey lawsuits were described by Jennifer Rosenthal, vice president of communications at Grayscale, as “baseless” and “frivolous” respectively. “We remain steadfast in our belief that the conversion of GBTC to an ETF is the best long-term product structure for investors, and are 100 percent committed to that endeavor,” she says.

As it stands, the various parties are locked in a deadlock; Grayscale says it’s not going anywhere and remains confident in the strength of its case against the SEC, while activists scratch their heads over how to oust the firm.

Meanwhile, the situation threatens to devolve into a mudslinging contest, Parish says, as Grayscale tries to ride out this difficult period.

It’s not necessarily in Grayscale’s best interest to convert to an ETF too quickly, he says, because the recent negative press surrounding DCG and its subsidiaries (the lending arm of one subsidiary, Genesis, filed for bankruptcy in January) is likely to send investors running for exit as soon as possible, taking with them millions of dollars in management fees.

“Grayscale’s whole strategy here is to limit redemptions and then PR, PR, PR. And to fight legal battles on whatever field they have to fight,” Parish claims.

Sonnenshein disputes the idea that enabling redemptions will trigger a customer exodus, arguing that the “regulated, battle-tested” ETF structure will attract an even larger audience and an even larger amount of capital into bitcoin. He also says that it has been the plan to convert the trust into an ETF from the start. “This is something investors want and deserve,” he says.

If the courts were to rule against Grayscale and the company exhausts all remaining legal appeals, Sonnenshein says it would pursue a tender offer in which a portion of shareholders are bought out of their shares at a price set with “investor fairness” in mind.

But RedeemGBTC and Fir Tree do not share Grayscale’s belief in the strength of its case against the SEC, described by the pair as “doomed” and “wasteful” respectively, pointing to the need for an urgent resolution to the situation.

“If we thought Grayscale was going to be successful [in converting GBTC to an ETF], we wouldn’t try to stop it. We just don’t think it’s going to happen – so something has to be done, says Bailey.

Three other shareholders say they believe an ETF is unlikely to be approved while SEC Chairman Gary Gensler remains in charge. (Gensler’s term is set to end in 2026.) The SEC declined to comment.

“The [Grayscale] are going to dig their heels in and fight to the end, but it’s not going to bode well for them, says McClurg. “Financial services are a trust game; once your customers lose faith, you’ll never get them back. In the long run, I think they are finished.”