Osprey Bitcoin Trust: Now A Liquidation Value Play

Summary The Osprey Bitcoin Trust discount to NAV range is currently trading between 7-9%. The company's tender offer to buy OBTC shares at NAV was terminated due to SEC regulations, causing the NAV ratio to collapse further in late February. Osprey plans to sell or merge the fund with an existing Bitcoin ETF, but if unsuccessful, the fund will be liquidated and capital returned to shareholders. Three months ago, I covered the Osprey Bitcoin Trust ( OBTC ) for Seeking Alpha. At that time, it was a fairly simple thesis. The conversion of Grayscale's Bitcoin Trust ( GBTC ) from a closed-end fund structure to an ETF eliminated the pricing arbitrage that GBTC traders had been enjoying for several years. As a closed-end fund, OBTC still provided arb traders a nice opportunity at a then 14% discount. Data by YCharts Fast forward to late-April, and the fund's shares are trading at a fairly tight discount to NAV range between 7-9%. The elephant in the room is the massive collapse in the ratio in the second half of February and the quick recovery in early March. Tender Offer Termination In my prior article, one of the reasons that I felt OBTC made some sense as an arbitrage trade was due to Osprey's tender offer to buy as much as 20% of the OBTC shares outstanding at NAV. My thinking, and I assume Osprey's reasoning as well, was that the very signal of support for shareholders would resonate with the market and value buyers would see an opportunity to get BTC exposure at a discount. A few weeks after the tender offer was announced, it was terminated. As Osprey explained in the press release announcing the termination, the offer was not conducive with the SEC's administration of Rule 13e-4 under the Securities Exchange Act of 1934: The Sponsor has determined that such a change in the structure of the Offer would have had a material adverse effect on either the tendering unitholders, or the non-tendering unitholders, and would result in the Offer being either (i) dilutive to non-tendering unitholders or (ii) dilutive to tendering unitholders. Such results would have been inconsistent with the operation with the Trust, which depends on investors entering and departing the Trust at NAV With the tender offer pulled, the NAV ratio once again collapsed and fell as low as 32% at the end of February. However, as readers can infer from the chart above, the discount rate quickly recovered to the current range when Osprey announced next steps a few weeks later. Courting Suitors On March 5th, Osprey announced its intention to sell the fund to an existing ETF manager: As part of the strategic process, the Sponsor plans to consider a wide range of options, and is in various discussions about a potential sale of the Trust to, or merger with, an existing Bitcoin ETF. In the event such talks do not conclude positively, the Sponsor intends to liquidate and dissolve the Trust within 180 days from today. That last point is the most important one, in my opinion, because it indicates that OBTC shareholders will get closure on this one way or another. In the event that Osprey can't find a suitor for the fund's assets, the company will sell the Bitcoin ( BTC-USD ) held by the fund and dispense the capital back to shareholders. Essentially, OBTC is trading at a discount to liquidation value provided BTC's nominal price doesn't fall further than 7% between now and the last day of August - which is 180 days from the company's most recent announcement. Sale More Likely? There are now roughly a dozen spot Bitcoin ETFs in the United States market and even more outside of the US market. Any one of them could theoretically be a suitor as almost every single US-listed spot ETF now holds more BTC than Osprey's fund does. The question is, who would be a viable candidate to buy Osprey's Bitcoin business? Shares Outstanding 5,940,536 BTC Per Share 0.000328 BTC Price $66,000 AUM $128,600,723 Annual fees at 0.49% $630,144 Annual fees at 0.2% $257,201 Source: Osprey, author's calculations For me, the problem for another ETF issuer is the fund's management fee is higher than what the market rate currently is for many of these competing funds. If an ETF issuer were to buy Osprey and reduce the expense ratio in line with current levels, we're really only talking about a quarter of a million dollars in annual fee revenue. Given that, I'm not sure it's worth it to most of these funds to buy the business. Especially considering the fund shares are still trading at a discount. The kind of potential buyer who may be interested in this sort of business may actually be better off just buying OBTC shares on the open market and playing the arbitrage rather than buying the actual business. For that reason, I suspect OBTC is more of a liquidation play than anything else at this point. Risks The risk in buying OBTC for the shareholder payout is that the price of BTC is still very volatile. For example, if a speculator were to buy OBTC at a 7% discount only to see the price of BTC decline by 8% before fund liquidation, then the trade didn't really work. That said, if a value buyer's ultimate goal from buying OBTC at a discount is to use the liquidation proceeds to buy one of the spot ETFs shortly after liquidation, it could theoretically still make sense to purchase OBTC and wait it out even if the price of Bitcoin goes down before liquidation. OBTC IBIT Shares outstanding 5,940,536 479,560,000 BTC per share 0.000328 0.00057 Share price $19.51 $36.67 Shares w/$10k 512.56 272.70 BTC allocation 0.1681 0.1556 Sources: Osprey, BlackRock, author's calculations In the table above, I'm showing how $10k invested in OBTC at April 19th closing prices results in more BTC exposure than through the iShares Bitcoin Trust ( IBIT ). If one's only concern is buying as much BTC as possible, there is a case to be made for buying OBTC, taking the liquidation, and putting the capital right back to work in the spot ETFs. The end result would be a larger net BTC position following the trade provided the price of BTC doesn't move drastically higher between the liquidation of the fund and the time the shareholders gets access to the payout. Which to be clear, is a perfectly legitimate risk to consider. Summary For me, OBTC is worth a small position. I don't think there's a high likelihood that the fund will be purchased outright. The problem is, the fee isn't competitive any longer and anyone willing to buy the business may see a better return from just playing the NAV rate arb with the rest of the market. I think the best way to minimize entry price risk before a potential liquidation would be to buy OBTC in small increments between now and the end of August when the fund would hypothetically be dissolved.