Let's talk about dissolution.
During the last few days there has been a constant chatter on Twitter about Grayscale dissolution.
Dissolution means the act of unwinding the Trust, reimbursing the subscribers of their share’s NAV
One of the best article to understand what we are talking about is the following:
Grayscale Liquidation Could Unleash A Bitcoin ArmageddonRecent events have led Grayscale Bitcoin Trust to become potentially the single biggest risk to the Bitcoin market. As NewsBTC reported, Genesis Global had to pause all withdrawals for its lending business on Wednesday due to “unprecedented market turmoil.”
This is concerning for the Grayscale Bitcoin Trust in that Genesis Global served as the liquidity provider for the trust. Genesis Global’s parent company is Digital Currency Group (DCG). This in turn is also the parent company of Grayscale.
Shortly after the Genesis announcement, Digital Currency Group clarified that the matter would have no impact on its own business. DCG stated that Genesis is not a service provider “for any” Grayscale product.
Given the sheer size of the GBTC holdings, in case of a forced sell the impact would be massive:
The Grayscale Bitcoin Trust currently holds 634,000 BTC. The Terra Luna Foundation “only” liquidated 80,000 Bitcoins, and still managed to crash the BTC price from $40,000 to $20,000.
The worrying part is the lack of willingness of giving transparency about reserves:
The Bitcoin community is now demanding proof that Grayscale actually holds roughly 634,000 BTC in reserve at Brian Armstrong’s Coinbase. However, neither Grayscale nor Coinbase have shown any reaction so far.
All that is currently available is a CSV file that is updated daily. As analyst Dylan LeClair explained, it should be relatively feasible to produce a proof of reserves if all BTCs are held at Coinbase.
What happens in the case of a dissolution? Well, not much guessing in this case, there are precise sources where you answer it.
Firstly, there is a document by GBTC itsel from on the SEC website:
SourceThis documents says it’s upon discretion of the Sponsor to redistribute directly the underlying assets (or variations of) or the proceeds of the sales on the market.
Actually, this is what it is happening right now as, Grayscale is dissolving a fund in these precise days (this could have sparked interest in the scenario of a GBTC dissolution.
Grayscale Investments Begins Dissolution of XRP Trust Citing Ripple SEC Suit The sequence of events in this case is the following Grayscale sells the XRP in the market and the proceeds of the sales are shared between the shareholders, of course the burden of the slippage is o their shoulders:
Cash proceeds from the trust’s liquidated XRP will be distributed to shareholders, Grayscale said, without providing estimates on the proceeds.
This is a decision that ultimately favours the investors as:
"It is likely to be increasingly difficult for U.S. investors, including the Trust, to convert XRP into U.S. dollars, and therefore continue the Trust’s operations," Grayscale said.
This to mean it is not a given fact the same path would be followed in the event of a GBTC dissolution.
So, What’s next?
An idea came from our mutual friend Nic Carter:
The idea is of going long the GBTC shares at discount, selling the future in same amount against it and profit from the closure of the Discount, irrespective of the final bitcoin price.
As noted in the comments, there are a few additional costs to care about, as the short position needs a financing (margin, financing costsare all adding to the costs of the trade).and also the long positions involves taking risks as counterpary risks.