Grayscale launches GBTC tender offer to help parent company DCG

Author | Qin Xiaofeng

Produced by | Odaily Planet Daily

Recently, the Wall Street Journal (WSJ) reported that Grayscale CEO Michael Sonnenshein said in a letter to investors that if the Grayscale Bitcoin Trust (GBTC) cannot be converted into a Bitcoin ETF in the end, it will consider a tender offer for the issued and outstanding shares. At that time, investors can sell their GBTC shares at a specific price at a specific time.

Sonnenshein said there is no specific timetable for when the repurchase will be carried out, but it is prepared for all situations; regarding the specific repurchase scale, the initial estimate is 20% of the outstanding shares. Of course, the final repurchase terms depend on the approval of the U.S. Securities and Exchange Commission and shareholders. Grayscale added that if the first attempt is successful, it may consider additional tender offers.

Why repurchase GBTC? Mainly to reduce the GBTC discount rate.

First, let me introduce the operation process of GBTC. Qualified investors pay a certain amount of investment to Grayscale, which buys BTC in the crypto market (custodied by Coinbase), then issues an equal amount of GBTC to investors and charges a 2% management fee each year; investors obtain GBTC and hold it for six months before they can sell it in the secondary market and cash out.

(GBTC market price and true value)

Before March 2021, GBTC had a prominent positive premium, and the secondary market trading price of each GBTC share was much higher than the actual value. At this time, investors could get a higher premium by selling GBTC. However, as the crypto market turned bearish, the positive premium of GBTC disappeared and gradually became discounted. The latest data shows that the actual value of GBTC per share is US$15.42, and the secondary market trading price is only US$7.91, with a discount rate of 48.7%.

Since GBTC cannot be redeemed at present, holders can either sell it at a discount or wait for GBTC to be converted into a Bitcoin spot ETF and then sell it at its true value. This is also the direction that Grayscale has been working on for the past year - submitting a spot Bitcoin ETF application to the SEC. "Converting GBTC to an ETF will help align its stock price with its underlying value. Market participants will be able to create and redeem shares of GBTC to ensure that they reflect the underlying value of the Bitcoin they hold."

However, the SEC eventually rejected Grayscale's application, and Grayscale also filed a lawsuit against the SEC, which is still ongoing. In such a time window, Grayscale is so "enthusiastic" to propose a new plan to repurchase GBTC. Its core purpose is to save its parent company DCG (Digital Currency Group) and solve its liquidity crisis.

According to previous media reports, DCG owes Genesis a loan of $1.7 billion. As Genesis creditors liquidate, DCG faces repayment pressure; in addition, the crypto exchange Bitvavo has 280 million euros in DCG, which cannot be withdrawn temporarily due to liquidity issues. Last week, several DCG-related cryptocurrencies (FIL, ZEN, ETC, NEAR, etc.) were sold on a large scale, and it is suspected that DCG liquidated related assets.

At the same time, DCG, Genesis, Coindesk and a number of affiliated companies hold a large amount of GBTC assets. According to Grayscale's official documents, as of September 30, 2022, the above institutions held a total of 66,972,899 shares of GBTC, accounting for about 10% of the outstanding shares. (Note: Grayscale stated that DCG and Genesis are not counterparties or service providers for GBTC or any other Grayscale products.)

(Grayscale's third quarter announcement)

According to Grayscale CEO Michael Sonnenshein, subject to Section 144 of the Securities Exchange Act of 1933, the above-mentioned institutions are only allowed to sell 1% of the total outstanding shares to the open market every three months. In other words, if DCG and other companies want to cash out their GBTC through the secondary market, they will have to wait for more than two years. In order to solve the urgent problem and allow DCG to recover funds as soon as possible, tonight's repurchase plan was made.

It is important to note that DCG’s investment in GBTC has been loss-making to date.

According to Odaily Planet Daily, DCG has spent a total of $1.305 billion to purchase 54,823,667 shares of GBTC since the first quarter of 2021, with an average price of $23.8 per share. Based on the latest market price ($7.92), DCG has lost $871 million; however, if it can repurchase at its true value ($15.42) in the future, DCG will still lose $460 million.

The loss was so huge because DCG misjudged the situation and continued to increase its holdings in the bear market. In particular, in the second quarter of this year, DCG spent $550 million to buy 36.74 million shares of GBTC. As the market fell, its assets were halved. Secondly, the discount rate of GBTC continued to rise, from about 20% at the beginning of the year to the current 48%.

Currently, Grayscale is still working hard to convert GBTC into an ETF. The company said that even if it is ultimately unable to successfully repurchase as desired, it will continue to operate GBTC until it is successfully converted into a spot Bitcoin ETF.