Ryan Selkis, founder of Messari Crypto enlightened on Grayscale with his explanations:  Grayscale continues to be the most misunderstood product in crypto…even amongst people who know a lot about the space, and the ETF arms race. Today’s announced DCG “buyback” is a sleight of hand that does nothing structurally to close the discount to NAV.

First, this is all public information, you just need to know where to look in the filings. Grayscale is a wholly owned subsidiary of DCG. They are the sponsor of the Bitcoin Investment Trust (GBTC), a quasi-ETF with no redemptions.

A normal ETF has “authorized participants” (brokers) create and redeem baskets of shares by trading the underlying assets and the shares they represent until price per share = underlying net asset value. Grayscale is not an ETF, it’s a trust that went public through Rule 144.

Rule 144 paved the way for accredited investors to pile into Grayscale trusts early, then flip them to retail for mega-premiums after a holding period of 6-12 months (depending on the trust). It’s a hack to bring these products to market, and it was a bootstrapping mechanism.

The premiums existed because of a supply-demand imbalance. But then bitcoin got easier to access as an institutional investor, and the Grayscale trade got crowded in 2020. As new AUM hit the 6 month holding mark, it started flooding the public GBTC market. Premium -> Discount

Well no big deal, right? You can always redeem shares in an ETF for the underlying! Not so fast. Grayscale can’t run a “continuous offering” of new shares AND offer a redemption program concurrently. Ironically, they were slapped for doing so in 2016!

That means the only two paths to liquidity are GBTC sales or Grayscale pursuing a Reg M redemption program once again. This is something they CAN do based on the fact that they have suspended their new creations and are no longer running a continuous offering.

If you want something that is true, but not the whole truth, it’s “we got in trouble for a Reg M redemption program in 2016, which is why we suspended it.” The whole truth is that a similar program is possible today, but why would Grayscale give up their AUM and ETF leverage?

Grayscale as the sponsor is the ultimate decision maker when it comes to whether it: + files for an ETF conversion + pursues a Reg M redemption program + liquidates its trusts All three are money from one pocket to the other.

Door #1 is the sensible path. I’m on team Barry. Gary Gensler is asleep at the wheel or willfully complicit in the $8 billion gap that exists between GBTC and the trust’s NAV. Grayscale will “pursue” this path, with 0% urgency to actually making it to market as a spot ETF.

That’s because!!! They can claim they can’t do Door #1 and Door #2 concurrently. “We won’t do redemptions until the SEC approves an ETF” is them holding AUM hostage until Gensler allows GBTC to convert. In the meantime, the gravy train keeps running.

This brings us to the “news” DCG is authorized to scoop up $1 billion in GBTC. This isn’t heroism, it’s a PR stunt to make unwitting investors think DCG can close the NAV gap (impossible given the size of the trust). What they’re doing is buying a 100% free call option.

Why is this a free option? + Door #1: ETF converts, GBTC comes back to par + Door #2: AUM sits there, DCG is *paying itself* the 2% management fee to its wholly owned sub, grayscale + Door #3: They roll out reg m redemptions OR liquidate the trust. btc get distributed at par

This is a clever PR move, and I don’t fault Grayscale for playing the SEC’s game, even though it’s on par with Ripple’s shenanigans in terms of misdirection. What makes this galling is that Gary Gensler would rather allow this to continue vs. approve a spot ETF.

It’s absolutely disgusting. Gary Gensler is a bald-faced liar if this is what he calls investor protection. They should approve the GBTC conversion. Grayscale has earned its fees, but not at the expense of shareholders who the SEC is supposed to protect.

Community response:  Thanks for this. By now it should be clear that Gary Gensler “investor protection” is nothing but an empty phrase. He is protecting big money and accepts retail being betrayed by inferior products bleeding $$$, such as GBTC or the Bitcoin Future ETFs.