Grayscale Investments, the largest digital asset manager in the world, is facing a wave of share redemption requests from its investors after Alameda Research, a crypto trading firm, withdrew its lawsuit against the company. The lawsuit, which was filed in March 2023, accused Grayscale of imposing excessive fees and delaying investor redemptions from its two cryptocurrency-focused trusts, the Grayscale Bitcoin Trust (GBTC) and the Grayscale Ethereum Trust (ETHE).
Alameda Research is an affiliate of FTX, a cryptocurrency exchange that collapsed in November 2022, leaving many investors and creditors in losses. Alameda claimed that it had invested in GBTC and ETHE through FTX and that Grayscale’s redemption policies prevented it from realizing around $250 million in value. Alameda also alleged that Grayscale and its parent company, Digital Currency Group (DCG), along with their CEOs, Michael Sonnenshein and Barry Silbert, were enriching themselves at the expense of shareholders by charging high management fees and preventing them from selling their shares at fair market prices.
Alameda sought to unlock $9 billion or more in value for shareholders by instituting a redemption plan for both trusts and reducing their associated fees. However, in January 2024, Alameda voluntarily dismissed its lawsuit, without providing any explanation. A representative for Grayscale stated, “Alameda’s voluntary dismissal underscores Grayscale’s position that this legal action was entirely without merit.”
Grayscale’s Conversion to ETFs
Grayscale’s trusts are not exchange-traded funds (ETFs), which are securities that track the performance of an underlying asset or index and can be traded on stock exchanges. Grayscale’s trusts are private placements that are only available to accredited investors and have a lock-up period of six months before they can be sold on the secondary market. Grayscale’s trusts also trade at a premium or discount to the net asset value (NAV) of their underlying assets, depending on the supply and demand of the shares.
In January 2024, Grayscale announced that it had received approval from the U.S. Securities and Exchange Commission (SEC) to convert its GBTC into an ETF, which would allow investors to buy and sell shares at NAV and reduce the management fee from 2% to 0.5%. Grayscale also said that it was working on converting its other trusts, including ETHE, into ETFs as well. Grayscale’s GBTC ETF started trading on NYSE Arca on January 10, 2024, under the ticker symbol GBTC.
Share Redemption Rush
Following Grayscale’s conversion of GBTC into an ETF, many investors who had bought GBTC shares at a premium in the past sought to redeem their shares and exit their positions. According to data from Grayscale, the GBTC ETF had a total of 1,050,000 shares outstanding as of January 21, 2024, down from 1,250,000 shares as of December 31, 2023. This means that 200,000 shares, or 16% of the total, were redeemed in less than a month.
The redemption pressure also affected the price of GBTC shares, which dropped from $40.50 on January 10, 2024, to $35.00 on January 21, 2024, a decline of 13.6%. The GBTC ETF also traded at a discount of 2.5% to its NAV as of January 21, 2024, indicating that the supply of shares exceeded the demand.
Grayscale’s ETHE trust, which has not yet been converted into an ETF, also saw a similar trend. The ETHE trust had a total of 150,000 shares outstanding as of January 21, 2024, down from 200,000 shares as of December 31, 2023. This means that 50,000 shares, or 25% of the total, were redeemed in less than a month. The ETHE trust also traded at a discount of 8.7% to its NAV as of January 21, 2024.
Implications for Grayscale and the Crypto Market
Grayscale’s share redemption rush has several implications for the company and the crypto market. On one hand, it shows that Grayscale’s conversion to ETFs was a positive move for investors, as it gave them more liquidity and lower fees. On the other hand, it also shows that Grayscale’s trusts were overvalued in the past and that investors are now adjusting their expectations and valuations. Grayscale’s redemption rush also affects the demand and supply of the underlying assets, such as Bitcoin and Ethereum, as Grayscale has to sell some of its holdings to meet the redemption requests. This could have a negative impact on the prices of these cryptocurrencies in the short term.
However, in the long term, Grayscale’s conversion to ETFs could benefit the crypto market, as it could attract more institutional and retail investors who prefer to invest in regulated and transparent products. Grayscale’s ETFs could also serve as a benchmark and a catalyst for other crypto ETFs to be approved and launched in the U.S., which could increase the adoption and innovation of the crypto industry.
