Marlton Urges Grayscale Bitcoin Trust (GBTC) Sponsor in Open Letter to Encourage its Parent to Conduct a Modified Dutch Auction Tender Offer

CHICAGO, April 6, 2021 /PRNewswire/ — Marlton, LLC (“Marlton”), an investment management firm that holds a significant and long-term position in shares of Grayscale Bitcoin Trust (“GBTC” or the “Fund”), today issued an open letter to the Board of Directors of Grayscale Investments, LLC, the sponsor of the Fund (the “Sponsor”), advocating immediate action to address GBTC’s significant discount to net asset value.

As a committed, long-term stockholder, Marlton believes in the strategy of offering investors exposure to Bitcoin (“BTC”) in the form of an equity security, thereby avoiding the challenges of investing in BTC directly. Still, Marlton’s letter notes that despite GBTC’s competitive advantage as the world’s largest Bitcoin fund, its shares have traded at a dramatic discount to net asset value, or NAV. Marlton currently estimates that discount to be over $3.1 billion in total. Given the estimated $600 million in fees the Sponsor collects every year, a true tender offer is the correct value creating initiative for GBTC stockholders.

The letter states, in part:

“Despite GBTC’s competitive advantage as the world’s largest Bitcoin fund, GBTC’s shares have dramatically traded at a significant discount to NAV that currently represents over $3.1 billion in lost value to trust stockholders.¹”

“We recommend DGC and the Board conduct a meaningful Modified Dutch Auction Tender Offer for GBTC shares. A tender offer is a superior value-creating initiative, offering stockholders the ability to sell their shares for a specified price and within a particular window of time for an offered price at a premium to the market price and contingent upon a minimum or a maximum number of shares sold. We believe a tender offer would materially narrow — if not eliminate — the discount to NAV, immediately offering stockholders confidence in the Sponsor’s ability to manage the Fund’s discount.”

Furthermore, Marlton notes that the Modified Dutch Auction Tender Offer is a well proven closed-end fund strategy that is often initiated by sponsors or managers for the purposes of closing discounts to NAV. Noting that prior efforts by the Sponsor and DCG have been ineffective in addressing the valuation discount, Marlton’s letter further states:

“On March 10, 2021, you announced a private placement suspension and parent Digital Currency Group, Inc.’s (“DCG”) authorized purchase of up to $250 million worth of shares of the Fund [. . . .] The approved authorized purchase is ineffective and that has been shown through the market’s reaction — a deeper discount to NAV.” 

“From a governance perspective, we are frustrated that the Board might allow management to squander the Company’s leading market share to the detriment of GBTC stockholders, whilst simultaneously rewarding yourselves handsomely with a profligate, market leading, 2% management fee. Marlton and other stockholders will not tolerate such clear destruction of stockholder value.” 

Responding to a recent announcement that the Sponsor plans to re-apply to the U.S. Securities and Exchange Commission to convert GBTC into an exchange traded fund (“ETF”), Marlton noted that prior applications of this nature in 2016 and 2017 were not approved, and that GBTC stockholders deserve more from the Sponsor than this failed and inadequate “wait and see” approach.

The full text of the letter follows below:

April 6, 2021

Grayscale Investments, LLC
Attn: Board of Directors (the “Board”)
250 Park Avenue South
New York, New York 10003
Dear Members of the Board,

As you are aware, Marlton LLC, together with its affiliates (“Marlton,” “we,” or “us”), is a committed, long-term stockholder of the Grayscale Bitcoin Trust (“GBTC” or the “Fund”). We acquired a position in the Fund because we believe in your strategy of offering investors exposure to Bitcoin (“BTC”) in the form of an equity security, while also avoiding the challenges of buying, storing, and safekeeping BTC directly. Marlton has a demonstrated track record of success in investing in closed-end funds.

GBTC Suffers From an Abysmal Discount to NAV and We Believe Current Efforts to Close that Gap Will Be Ineffective

Despite GBTC’s competitive advantage as the world’s largest Bitcoin fund, GBTC’s shares have dramatically traded at a significant discount to NAV that currently represents over $3.1 billion in lost value to trust stockholders.² And as you no doubt know, your discount recently hit a “record” low of 14%.³ As such, we are suggesting concrete steps the Fund should take to address its pressing challenge – the current discount to NAV. We appreciate that this issue has come under your purview only recently; still we hope that you share our view that GBTC’s substantial discount must be handled with the utmost urgency.

On March 10, 2021, you announced a private placement suspension and parent Digital Currency Group, Inc.’s (“DCG”) authorized purchase of up to $250 million worth of shares of the Fund. While helpful, as you admit in your press release announcing the transaction, this action does not obligate DCG to acquire any specific number of shares during any period, and may be modified or discontinued at any time without notice.⁴ The approved authorized purchase is ineffective and that has been shown through the market’s reaction — a deeper discount to NAV.

Furthermore, Grayscale Investments’ recently announced plan to re-apply to the U.S. Securities and Exchange Commission (“SEC”) to convert GBTC into an exchange traded fund (“ETF”) is simply doubling-down on a “wait and see” strategy. Similar Bitcoin ETF applications for GBTC were rejected in 2016 and 2017. We are not persuaded by Grayscale CEO Michael Sonnenshein’s recent explanation to CoinDesk that GBTC’s discount is a non-issue and simply due to supply and demand.⁵ We also believe this explanation to be irresponsible and indicative of a disregard for the fiduciary duties of a responsible manager. Maximizing stockholder value should be Mr. Sonnenshein’s focus and therefore he and management should be actively addressing GBTC’s deep discount to NAV.

From a governance perspective, we are frustrated that the Board might allow management to squander the Fund’s leading market share to the detriment of GBTC stockholders, whilst simultaneously rewarding yourselves handsomely with a profligate, market leading, 2% management fee. Marlton and other stockholders will not tolerate such clear destruction of stockholder value.

GBTC Stockholders Deserve a Real Tender Offer

For these reasons, we recommend that DGC and the Board conduct a meaningful Modified Dutch Auction Tender Offer for GBTC shares. A tender offer is a superior value creating initiative, offering stockholders the ability to sell their shares for a specified price and within a particular window of time for an offered price at a premium to the market price and contingent upon a minimum or a maximum number of shares sold. We believe a tender offer would materially narrow — if not eliminate — the discount to NAV, immediately offering stockholders confidence in the Sponsor’s ability to manage the Fund’s discount.

Rather than market forces of supply and demand, the GBTC discount indicates that the market has lost faith in the Fund’s ability to significantly add stockholder value worthy of your 2% management fee. Aggressive competition from NYDIG⁶, Galaxy Digital⁷, and BlockFi⁸, among others, threatens GBTC’s dominant U.S. market position, as the cryptocurrency industry awaits the SEC’s decision to approve cryptocurrency ETFs. A clear capital allocation plan via a tender offer in GBTC, will distinguish you and GBTC as the sole digital currency asset manager creating stockholder value worthy of their 2% management fee beyond sole digital currency exposure.

* * *

We look forward to engaging in a constructive dialogue with the Fund and the Board and working together to achieve the best outcome for GBTC stockholders. Although we expect these conversations to be productive, we reserve all rights to take further action in order in order to protect the investments of us and other stockholders. To that end, we expect to hear from you soon.

Thank you for your attention to this matter.

Sincerely,

/s/ James C. Elbaor

James C. Elbaor
Managing Member of the General Partner,
Marlton Partners, L.P.

About Marlton, LLC

Based in Chicago, Marlton LLC is a privately-held investment firm and family office run by James C. Elbaor. The firm has a demonstrated track record of success in investing in closed-end funds and it acquires significant ownership positions in companies and other assets where it believes long-term value can be enhanced through active ownership. Mr. Elbaor holds a B.A. from New York University and an M.B.A. from Columbia University.

FORWARD-LOOKING STATEMENTS

All statements contained herein that are not clearly historical in nature or that necessarily depend on future events are “forward-looking statements,” which are not guarantees of future performance or results, and the words “anticipate,” “believe,” “expect,” “potential,” “could,” “will,” “opportunity,” “estimate,” and similar expressions are generally intended to identify forward-looking statements. The projected results and statements contained herein that are not historical facts are based on current expectations, speak only as of the date hereof and involve risks that may cause the actual results to be materially different. Certain information included in this material is based on data obtained from sources considered to be reliable. No representation is made with respect to the accuracy or completeness of such data, and any analyses provided to assist the recipient of this material in evaluating the matters described herein may be based on subjective assessments and assumptions and may use one among alternative methodologies that produce different results. Accordingly, any analyses should also not be viewed as factual and also should not be relied upon as an accurate prediction of future results.  Marlton disclaims any obligation to update the information herein and reserves the right to change any of its opinions expressed herein at any time as it deems appropriate. Past performance is not indicative of future results. Marlton has neither sought nor obtained the consent from any third party to use any statements or information contained herein that have been obtained or derived from statements made or published by such third parties. Except as otherwise expressly stated herein, any such statements or information should not be viewed as indicating the support of such third parties for the views expressed herein.

SOURCE Marlton LLC

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