Hedge fund Fir Tree Capital is suing Grayscale over its Bitcoin Trust product, which is trading at a 43% discount as of Tuesday.
Fir Tree is suing Grayscale
The hedge fund Fir Tree Capital Management has, according to a Bloombergreport filed a lawsuit against digital asset manager Grayscale Investments. This is about “potential mismanagement and conflicts of interest” at the company’s Bitcoin fund.
The news came as the Grayscale Bitcoin Trust (GBTC) discount fell to a record low of more than 43% relative to the underlying Bitcoin value. Fir Tree claimed that this is in part due to Grayscale issuing “an immense number” between 2018 and 2021. They did so without providing any means for investors to exit their positions beyond selling shares to other investors.
GBTC is a financial tool that allows investors to gain exposure to Bitcoin without having to physically purchase and hold the asset. The Bitcoin backing GBTC is held by crypto exchange Coinbase.
Historically, GBTC has traded at a high premium, but the situation changed in February last year. Shares of the trust gradually fell to a 37% discount last month.
According to Fir Tree, Grayscale’s redemption limit, which was introduced in 2014, is “self-imposed”. The hedge fund also claims there is no legal reason to prevent GBTC investors from converting their holdings into fiat as long as the trust complies with securities laws.
In its indictment, Fir Tree, which manages $3 billion, said about 850,000 private investors were “duped by Grayscale’s shareholder-unfriendly actions.”
The suit, filed Tuesday in the Delaware Chancery Court, is a “books and records” action. This means that documents are needed that could be used to push Grayscale to clear the discount. This can be done by reducing the annual management fee of 2% and resuming the repayments.
Grayscale has its sights on Bitcoin ETF
Fir Tree is also trying to prevent Grayscale from converting GBTC into a spot Bitcoin exchange-traded fund (ETF). This is something the company has been actively pursuing since last year.
“That strategy will likely cost years of litigation, millions of dollars in legal fees, countless hours of lost management time and goodwill with regulators.” That’s what Fir Tree’s lawyers said in the indictment. “All the while, Grayscale will continue to collect fees from the trust’s dwindling assets.”
However, Grayscale insists the company will not give up on those plans.
“We remain 100% committed to converting GBTC into an ETF. We strongly believe this is the best long-term product structure for GBTC and its shareholders.” A Grayscale spokesperson told Bloomberg.
All attempts to launch a Bitcoin ETF in the US have been blocked by the Securities and Exchange Commission (SEC). The agency has repeatedly denied or delayed applications received, including Grayscale’s.
Unfazed by the agency’s stance on the matter, Grayscale sued the SEC in June.
Moreover rented Grayscale legal counsel, including Donald B. Verrilli, Jr., former United States Attorney General, and the law firm Davis Polk & Wardwell. With this, it wanted to support the company’s ongoing campaign to convert its Bitcoin fund into an SEC-approved ETF.