The 'Widowmaker' Crypto Trade That Helped Blow Up an Industry

Joe Weisenthal (0:10)

Hello, and welcome to another episode of the Odd Lots Podcast. I'm Joe Weisenthal.

Tracy Alloway (0:15)

And I'm Tracy Alloway.

Joe Weisenthal (0:17)

Tracy, a lot has gone wrong for crypto in the last year or so.

I think, let's start there. I think that is safe to say that there are many different scandals, blowups, disasters, et cetera.

Tracy Alloway (0:31)

The background to that intro was right before Joe said it. He was going, how am I gonna start this one? And he just went with, bad things have been happening.

Joe Weisenthal (0:40)

We could go for a lot. We could just list them. We don't need to do that.

Tracy Alloway (0:43)

So one of the bad things that has been happening in the crypto industry has to do with several high profile entities. And I'm still trying to wrap my head around the relationships between all of them, but we need to talk about what's going on with Grayscale, Genesis and Gemini.

Joe Weisenthal (1:00)

Right, so for a long time, there's no Bitcoin ETF in the United States. For a long time, buying Bitcoin might have been a little tricky.

Maybe people didn't want to trust some of these online exchanges, some of them for good reasons. If you were some sort of regulated entity, like a fund or something or an advisor, you might not be able to get your client money into Bitcoin itself. But for a long time, GBTC, which is this entity owned by Grayscale, was one of the regulated vehicles that one could get exposure to Bitcoin.

Tracy Alloway (1:33)

Right, but not an exchange traded fund, importantly. It was, well, the Grayscale Bitcoin Trust, I think it's called. And because of its existence, we saw this trade that it really seems like a lot of people in the crypto world were doing, where they would basically borrow Bitcoin, deposit those with Grayscale in exchange for GBTC shares, and then eventually they would sort of offload those shares to retail investors. But that only works as long as there's interest in Bitcoin and the price is kind of going up. And now that everything seems to be going backwards or exploding in various ways, it's become problematic. And now we have this huge discrepancy between the value of Grayscale's Bitcoin and where the shares are actually trading.

Joe Weisenthal (2:22)

So this is really interesting. For a while, the Grayscale Bitcoin Trust, GBTC, and it's traded at quotes all day. It was a large premium to the underlying Bitcoin that it held, and now there is a big discount. And the key thing is, is that all of these entities that were in some way trying to arb the spread or trading Bitcoin versus GBTC, et cetera, they've now lost a lot of money. And I think, I mentioned at the very beginning, there have been a lot of disasters in crypto, but I think GBTC is at the center of many of them.

Tracy Alloway (2:57)

Yes, everyone seems upset about this. And I've kind of been following it a little bit, but not that much. And so I am very interested to pick apart the relationships between these various entities. Like why is Gemini that involved with Genesis?

How does it involve Grayscale as well?

Joe Weisenthal (3:14)

You know, superficially, this is gonna be a crypto episode, but really it's like a fund structure episode more than anything else. It could be anything, but it happens to be a trust that owns a lot of Bitcoin. Anyway, we need an expert here who's going to explain what was the GBTC trade that so many different entities get into, why it gets so much trouble, all these new disputes. I'm very excited. We're gonna be speaking to Ram Ahluwalia. He is the founder of Lumida, which is a private wealth advisor.

He knows a lot about this stuff. So Ram, thank you so much for coming on Odd Lot.

Ram Ahluwalia (3:49)

Thank you for having me.

Joe Weisenthal (3:51)

What is GBTC?

Ram Ahluwalia (3:53)

So GBTC is the security issued by Grayscale. It is a security that trades on the market. And right now it has a discount to the net asset value. And that net asset value is based on the value of the Bitcoin held by the trust.

GBTC is issued by Grayscale, which is a wholly owned subsidiary of Digital Currency Group.

Tracy Alloway (4:19)

And what's the relationship between Grayscale and Genesis and Gemini? Let's just do the whole, let's name all the players at the beginning.

Ram Ahluwalia (4:27)

We'll introduce the cast of characters. So first off, you've got Digital Currency Group founded by Barry Silber, a was and is a storied institution, really one of the blue chip firms that also seeded and invested in quite a few companies in the category. So DCG created a business called Grayscale, and Grayscale was the first to issue a publicly exchange traded security that represented access to Bitcoin. It was wildly successful.