Market Lab Report - GBTC/ETHE Grayscale Issues; Markets

by Dr. Chris Kacher

GBTC/ETHE Grayscale Issues

The CEO of Grayscale wrote in their end of year letter:

Grayscale’s parent company, Digital Currency Group (DCG) and our affiliate firm, Genesis Global Capital are not counterparties or service providers for GBTC or any of our other products, and as such, do not impact our 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. Both DCG and Genesis Global Capital are affiliates of GBTC, as well as shareholders, and, together with other affiliated entities, collectively own nearly 10% of the total shares outstanding; pursuant to Rule 144 of the Securities Act of 1933 they are collectively only permitted to sell a limited number of the total shares outstanding into the public markets every three months. 

So this implies there won't be a "bank run" on GBTC. But the CEO goes on to write:

If GBTC is able to conduct a tender offer for a portion of the GBTC shares, following the tender offer, we currently expect that we would continue operating GBTC without an ongoing redemption program until we are successful in converting it to a spot bitcoin ETF, although we may consider doing additional tender offers thereafter, subject to obtaining SEC relief. In the event we are unsuccessful in pursuing options for returning a portion of the capital to shareholders, we do not currently intend to dissolve GBTC, but would instead continue to operate GBTC without an ongoing redemption program until we are successful in converting it to a spot bitcoin ETF.  

So this means they can conduct a tender offer of a size of their choosing if the SEC allows it. If not, a portion of capital will not be returned to shareholders until they are successful in converting GBTC into a spot bitcoin ETF. This would be a while so don't hold your breath. Grayscale sued the SEC for preventing them from launching a Bitcoin ETF. Court cases can take a number of years to settle. Meanwhile, shareholders are stuck. At the time of this writing, GBTC is off just over -90% from peak while BTC is off about -75% from peak. This is not a difference of -15%. It would take a 10-fold gain for investors in GBTC to break even vs. a 4-fold gain for holders of BTC.

On GBTC substitutes, do your due diligence and this is not investment advice but there are some alternates that trade on stock exchanges in the form of ETNs, not ETFs, that attempt to mirror the price of Bitcoin.

Markets

The drop in major stock market averages in Dec so far is similar to how markets performed in Dec-2018 which was the worst Dec for the S&P 500 since 1931. Both Dec-2018 and Dec-2022 had a hawkish Fed. The Fed pivoted after the Xmas crash on Dec 24, 2018. But 2022 is not 2018. Debt and inflation are far higher which strongarms the Fed into staying the course to fulfill their mandate of 2% inflation. Interest rates must climb above inflation to tame inflation. Meanwhile, inflation is still well above interest rates.

The NASDAQ Composite dead bat bounce was one of the more obvious as it lagged the Dow Industrials. No new bull market ever started with the Dow Industrials leading the way since they are a concentrated, blue chip, relatively risk-off index. The bounce in the NASDAQ also was far more begrudging compared to its prior bounces earlier this year. So unless we get some material news regarding a black swan or metrics that points to a far weaker economy than predicted which forces an aggressive pivot by the Fed, markets will likely head lower in the coming weeks to months as the Fed hikes at least two more times, bringing the FFR to 475-500.