Pressure continues to mount on Grayscale with its Bitcoin Trust (GBTC) and parent company Digital Currency Group. And as Ram Ahluwalia, CEO and co-founder of crypto-native investment advisor Lumida, pointed out in a recent wiretwo new characters, Valkyrie Investments and Fir Tree, are included in the ‘Shakespearian drama’.
The motivation of the second in particular is highly questionable. Fir Tree is a hedge fund with approximately $3 billion in assets under management (AUM) and hundreds of holdings. The SEC 13F filings show that Fir Tree owns First Citizen’s Bank, KKR, Comcast and hundreds of other securities. They are also big investors in oil and tobacco.
Ahluwalia therefore raises the question of why Fir Tree has an interest in GBTC as a value investor and filed a lawsuit against Grayscale at the beginning of December, especially since the hedge fund does not own much GBTC.
Fir Tree Capital Management filed the lawsuit seeking information that could be used to force changes in how the company operates its flagship Bitcoin Trust.
The lawsuit seeks Grayscale to reduce its fees, initiate redemptions and release documents related to its relationship with Digital Currency Group. In addition, Fir Tree is also trying to stop Grayscale’s attempts to convert its Grayscale Bitcoin Trust (GBTC) into a spot exchange-traded fund (ETF).
A major shortage of Bitcoin, Crypto and Tether?
Ahluwalia believes the arguments in the lawsuit do not reflect their true motivation. Fir Tree claims the motivation lies with the “end investors” such as “teachers, firefighters, police officers and other government officials” who own GBTC.
“There is a bigger story here… Be skeptical,” says Ahluwalia, explaining, “Fir Tree is taking a bigger gamble against the crypto ecosystem (USDT, Bitcoin, etc.) and pushing whatever softpoints it can find .”
The Chartered Financial Analyst (CFA) refers to that of Bloomberg in this regard revelation that Fir Tree took a large short position on Tether (USDT) in March 2022. Fir Tree is betting on a breakthrough of the USD/USDT linkto some extent a “bank run” by March 2023.
The position is structured as an “asymmetric trade”, meaning that the downside risk is low and the potential reward is high, with the official rationale for the trade being that “a large portion” of the trading paper backing the token is linked to Chinese real estate developers. , some of which are in trouble.
Furthermore, the analyst claims that Fir Tree has identified three”weak points” of the Bitcoin and crypto market that the hedge fund can rattle: Grayscale, the USDT bond and Binance, while Fir Tree cannot take any action regarding the exchange, according to Ahluwalia. On GBTC, the analyst notes:
Fortunately, I don’t see a credible path to dissolution of Grayscale Trust. The Trust is a cash cow and may receive a private valuation from a third party based purely on cash flows. What Fir Tree does is push on the loose legs of the stool.
With the lawsuit, Fir Tree could try to reduce the chances of DCG raising external capital, while its own bet has about 3 months to run. It is also not clear from the 13F filings whether the hedge fund is also shorting Bitcoin or putting OTM on BTC.
Enemy of my enemy is my friend Dynamic
Valkyrie, even with “heroic” intent, is not making the situation any easier as they propose to take over the role of managing GBTC and cut fees from 2% to 75 basis points. In addition, Valkyrie would use Reg M. Either would hurt Grayscale’s valuation.
“My view is that Fir Tree is trying to hurt the likelihood of a VC increase and push DCG over the edge. […] Fir Tree and Valkyrie are strange bedfellows. Fir Tree bets against Tether. Valkyrie is being positioned as the hero for Bitcoin/GBTC holders. This is an ‘enemy of my enemy is my friend’ dynamic,” says Ahluwalia.
So for Bitcoin investors, the unresolved situation around DCG and Grayscale remains one of the biggest potential risks for further crypto-intrinsic market turmoil. At the time of writing, the BTC price was at $16,624.
Featured image of Kanchanara / Unsplash, chart from TradingView.com