Valkyrie Makes Long-Shot Bid to Take Over GBTC

January 03, 2023

Pressure mounted on Grayscale over the past week as a rival fund manager made a long-shot bid to take over management of the Grayscale Bitcoin Trust (GBTC). 

Valkyrie, the company behind the $19 million Valkyrie Bitcoin Strategy ETF (BTF), a bitcoin futures fund, and the $1 million Valkyrie Bitcoin Miners ETF (WGMI), unveiled a proposal on Wednesday that it claims will help close the gap between GBTC’s market price and net asset value. 

In the letter it posted to its website, Valkyrie said that “in light of recent events involving Grayscale and its family of affiliated companies, it is time for a change, noting that it was “the best company to manage GBTC to ensure its investors are treated fairly.” 

The Backdrop
Valkyrie no doubt sees an opening to take over GBTC in the midst of turmoil at Grayscale’s parent company, Digital Currency Group, and another one of DCG’s subsidiaries, Genesis Global Trading. 

Genesis, a crypto investment bank, halted withdrawals from its lending platform in November. The company reportedly lost hundreds of millions of dollars in 2022 as some of the firms it lent money to went bust.  

Now Genesis itself is on the brink of going belly up, and it’s unclear what that means for parent company DCG and its sister firm Grayscale.  

The uncertainty pushed the market price of GBTC to a record 49% discount compared to its net asset value last week. 

Self-Serving  

Valkyrie suggested the chaos at DCG is hurting investors in GBTC, and that a lot more can be done to bring the trust’s price closer to its NAV. 

In its letter, Valkyrie noted that if it were to take over management duties, it would slash the expense ratio of the fund from 2% to 0.75% and allow investors to redeem their shares at net asset value in exchange for cash or bitcoin. 

Currently, investors in GBTC do not have the option to redeem their shares, which is why the discount in the trust has been able to reach such a steep level. Grayscale has attempted to rectify the situation by converting GBTC into an ETF, but the SEC hasn’t allowed the conversion (which in turn prompted Grayscale to sue the regulator in June). 

Valkyrie said it would allow redemptions another way—"through a timely Regulation M filing”—hinting that Grayscale isn’t doing all that it can for GBTC investors.  

That echoes comments the Fir Tree hedge fund made when it sued Grayscale last month for mismanaging GBTC. 

According to Fir Tree, the redemption prohibition in GBTC is self-imposed by Grayscale, and there was nothing to stop the company from redeeming shares even under its current structure.  

Dead End  

Though sure to make DCG and Grayscale look bad, Valkyrie’s proposal to take over GBTC is unlikely to go anywhere. 

GBTC is a cash cow for Grayscale and parent company DCG, generating over $200 million in annual fee revenues, even at relatively depressed prices.  

There is little incentive for the companies to give that up outside of a compelling offer from a deep-pocketed acquirer. Even if it were in distress, DCG would have little trouble finding a suitor willing to pay a pretty penny for its Grayscale Trusts. 

That doesn’t seem to be what Valkyrie is proposing. Rather, it seems to be ginning up interest in its newly launched hedge fund, the Valkyrie Opportunistic Fund, which intends to “to take advantage of the massive discount in the spread between the NAV and price of GBTC.” 

Valkyrie said that as the fund increases its holdings of GBTC, “[it is] very interested in realizing the true value of the underlying bitcoin for [its] investors and will actively pursue this goal on their behalf.” 

 

Contact Sumit Roy at [email protected] 

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