Hedge Fund Sues Grayscale

Fir Tree Capital Management is suing Grayscale Investments for investment documents. Fir Tree claims it may have committed negligence and conflicts of interest in its $10.7 billion Bitcoin fund.

According to a complaint filed Tuesday in Delaware Chancery Court, the Grayscale Bitcoin Trust ended Monday at a 43% discount to the value of the Bitcoin it holds. This happened partly thanks to its recent issuance of numerous shares and its failure to redeem any.

The industry deals with the aftermath of last month’s bankruptcy of Sam Bankman-Fried’s crypto exchange FTX. This has led to a drop in Bitcoin and other cryptocurrencies. Respectively, the trust’s publicly traded shares have fallen by about 75% this year.

According to people familiar with Fir Tree’s intentions, the hedge fund intends to utilize the data to convince Grayscale to abolish the discount by reducing charges and restarting redemptions. Following the complaint, the trust has approximately 850,000 retail investors who Grayscale’s shareholder-unfriendly conduct has harmed.

Grayscale’s redemption level, which began in 2014, is self-imposed, according to Fir Tree. The hedge fund claims that since the trust adheres to securities laws, there is no legal prohibition against allowing investors to withdraw. Grayscale has stated that it cannot offer a forever redeemable program in regulatory documents.

According to the hedge fund, Grayscale refuses to return equity because it would jeopardize income. Between 2018 and 2021, the company sold a large number of new stock, according to the lawsuit. Rather than the lower market price of the shares, it charges 2% on the market value of its Bitcoin holdings, higher than competitors such as Osprey Bitcoin Trust. According to Fir Tree, Grayscale earned $615.4M in 2018 in commissions.

Distrust echoes through to Grayscale after the collapse of FTX and Three Arrows Capital

During the crypto bull run of 2020 and 2021, Grayscale Bitcoin Trust grew in popularity quickly. Consequently, it became the world’s biggest digital-assets fund. The trust’s price soared to a sustained premium above the value of its underlying Bitcoin due to an endless supply, fuelling one of the most popular arbitrage transactions in crypto.

The claim is made under the “books and documents” statute, which requires Grayscale to do something to stop the discount. Delaware judges often endow such requests.

Digital Currency Group’s companies’ purported interdependence. Fir Tree describes it as “particularly disturbing” given the recent incidents in the crypto ecosystem, including the rapid collapse of FTX and Three Arrows Capital. According to the business, the lack of independent monitoring by the fund is also a cause for concern.

While Fir Tree demands Grayscale stop any efforts of converting trust into an exchange-traded fund, Grayscale argues that that is indeed the only way to redeem shares legally.

Grayscale sued the US Securities and Exchange Commission after it rejected a similar fund conversion earlier this year.