Bitcoin's Biggest Trade Goes From Hero Creator to Widow Maker

Grayscale Investments’ proposal to buy out certain holders of its flagship Bitcoin trust is the money manager’s latest bid to stanch losses in a fund that’s been a linchpin in the dramatic rise and fall of the cryptocurrency universe.

For years, the Grayscale Bitcoin Trust (ticker GBTC) served as the conduit through which billions of dollars flooded into crypto to exploit a seemingly automatic arbitrage trade. Now, some of those same industry titans are crumbling into bankruptcy while others contend with a wave of distress sparked in part by this very trade. Most famously, the trust attracted Three Arrows Capital, which held more than 5% of GBTC before the hedge fund’s demise over the summer.

Barry Silbert’s Digital Currency Group, the parent of Grayscale, is one of the most important players now left standing — and dealing with a dilemma of its own design.

The setup was relatively straightforward: an investor would borrow Bitcoin (which, in many cases, involved using loans from Grayscale sister-company Genesis) and deposit those tokens with Grayscale in exchange for GBTC shares. The investor would then offload those shares at a markup to retail investors after a six-month lockup - or twelve months, prior to January 2020.

The trade’s popularity was in part powered by Grayscale’s own messages to and discussions with investors, including at industry events in Miami, communications reviewed by Bloomberg News show. Grayscale representatives encouraged attendees at Context Summits Miami in January 2020 to lock up their money in order to take advantage of the dislocation, according to a person who interacted with company officials at the time.