Bitcoin Trust Launched Today Takes Aim At $37 Billion Grayscale

As bitcoin grazes $50,000, a mad frenzy is underway to create crypto funds. Near the front of this stampede is an entrepreneur who has survived many a wild ride in the most volatile corners of Wall Street. Now is his moment to cash in.

Greg King, 46, is the controlling shareholder in Osprey Funds, manager of what is likely to become the second freely traded pure play bitcoin fund in the U.S. The first one, Grayscale Bitcoin Trust, is coining money. If King can siphon off just a little of the assets pouring into Grayscale, he’s got a hit.

Selling point for the Osprey Bitcoin Trust: a dramatic price cut. Grayscale takes 2% of its trust shareholders’ money every year. Osprey charges just under 0.8%.

It is one of the curiosities of securities law that these trusts even exist. The world yearns for an exchange-traded fund that would hold coins, much as State Street’s SPDR Gold Trust holds bullion. But the Securities & Exchange Commission is fearful that bitcoins might be too risky if wrapped into an ETF, and so far it has slapped down all the bitcoin ETF proposals that have been sent in.

Bitcoins risky? No kidding. But this odd state of regulatory affairs creates an opening for coin trusts—first Grayscale, which was set up in 2013 and now has $37 billion of the coins, and Osprey, in Tarrytown, New York, which was created two years ago and has $80 million worth.

These trusts can sell shares only to accredited investors, meaning ones that clear certain hurdles for net worth or sophistication. Then, once certain waiting periods have passed, those investors can sell to the general public in the over-the-counter market.

The coin trusts are halfway to being ETFs. While ETFs have a mechanism for both the creation and redemption of fund shares in response to investor demand, the trusts let money in but don’t let it out. They cease redeeming when an o-t-c ticker is assigned, at which point an investor can get out only by selling shares in the open market.

Twist my arm, say the original buyers. In a bull market, trust shares tend to trade at a premium to their coin value. Very nice for the sophisticated investors who buy in at net asset value.

Shares in Osprey Bitcoin Trust started trading this morning (February 16) under the ticker OBTC. The shares are aimed at the mass market, at a net asset value that starts out near $16.50. It’s not easy to stuff bitcoins into an IRA, but acquiring o-t-c shares for a self-directed account should be easy.

OBTC hit $58 in afternoon trading—an auspicious start, even if there is something a little artificial about the first day of anything. If OBTC continues to trade at a premium, King will have no trouble drawing in new assets. Investors (the sophisticated ones) can buy in with either cash or coins, one coin being good for 2,930 shares. So far most of the Osprey trust’s investors have arrived with coins.

What could go wrong? Lots. If coin lovers care more about popularity than price, they will stick with Grayscale and give Osprey a pass. Two other bitcoin trusts, from BlockFi and Bitwise, are hot on Osprey’s tail, although King says it will take them months to catch up to where he is with the permission to have trust shares freely traded. At some point, perhaps this year, the SEC will finally give the nod to coin ETFs; that move could unleash a flood of coin funds to compete for investors’ attention.

And then there is the risk that virtual currencies will disintegrate. Indeed, two Yale economists somehow managed to come up with a 0.4% probability that bitcoin’s price will go to zero. Well, it could happen, if a newly discovered flaw in the software made cryptocurrencies unreliable. A few months ago the merely passing suspicion of a double-spending problem sent bitcoin reeling.

Risk does not dismay King. This is a guy who once spent three months with his neck in a brace as a result of an Australian surfing expedition. As for financial risk, his entire career has been built around Wall Street’s casino tables. Or, as he puts its a little more circumspectly: “We focus on the difficult to reach exposures or asset classes, never in the stock-and-bond 60/40 world.”

At Osprey, King is engaged in his fourth round of creating products, almost all of them funds or notes involving something exotic, volatile or leveraged. Some of these products failed; one, a triple-leveraged bet on volatility, infamously blew up three years ago and was delisted. But in this business you are judged not by your flops but by your successes, and King has attracted a fair amount of venture capital to get his later ventures off the ground. He says, “You don’t have to be a billionaire to do what I’ve done. You just need to understand the system.”

And to have a certain work ethic. King is the son of a Vietnam vet and a Guatemalan immigrant. His father (now deceased) was largely absent during his childhood, he says; his mother raised three boys solo while getting a nursing degree. Starting with nothing, she slaved away to a comfortable retirement now.

Greg King entered the workforce at age 13, equipped with a Weed Eater and a lawnmower. At Pacific Union College he waited on tables. (Customers included Joe Montana and Francis Ford Coppola.) After getting an MBA at UC Davis, King learned the ETF business at Barclay’s, the original owner of the iShares lineup.

Restless, King quit in order to start, with two partners, something called VelocityShares. Their business was hyperactive derivatives—bank notes with payouts tied to multiples of the price movements in things like natural gas and silver. In 2014 the threesome sold Velocity to Janus Capital (now Janus Henderson). The price tag, including bonuses for meeting growth goals, came to $66 million.

King says he put all of his payoff—he won’t reveal the dollar amount—back at risk. In 2015 he started another vendor of the exotic, Rex Shares (the name is Latin for “king”). For several years Rex stumbled. A cocktail blending the S&P 500 with gold didn’t attract a following. An ETF with a portfolio of blockchain-related assets came out at just the wrong time, during the crash of 2018, and had to be folded.

Then Rex hit pay dirt when Bank of Montreal stepped in as distributor of a line of exchange-traded notes resembling those at Velocity: leveraged bets on tech stocks, gold mines and the like. Assets in those products climbed ten-fold in one year, topping $1 billion. Rex turned profitable in 2020.

Time for another risk-on venture. King had become fascinated with bitcoin in 2013. Hours after first hearing a mention of it at a conference, he was in his hotel room opening an account at Coinbase.

Rex had one of the early bitcoin ETF proposals shot down by the regulators. With Osprey, now a subsidiary of Rex but likely to be spun out, King pivoted to the trust design. As crypto investments go, its pricing is rock-bottom, with a management fee of 0.49% plus overhead, mostly for custody, that will start at 0.3% but go down if the trust grows.

Custody is no simple matter. Wording from a Grayscale filing seemingly lifted from a Mission Impossible script: After the key generation ceremony, all materials used to generate private keys, including computers, are destroyed.

Says King: “It’s hard to pull up a truck and haul away State Street’s gold. But you can lose [coins] with the click of a button.”

As he knows first hand. In a Sim swap attack, a thief takes control of the victim’s phone number and uses it to receive authentication codes. Two years ago somebody got some of King’s personal coin collection that way. How much? “Too painful to say.” Now, he says, he has “military grade passwords” and other safety measures. As for his fund: Its custodian will be an arm of Fidelity Investments, an institution that exudes trustworthiness.

Osprey Funds is not yet in the black, and probably won’t get there unless its trust grows well beyond today’s 1,639 coins. Bitcoin might go to zero, or it might go way beyond $50,000. King says one of his buddies started an ETF firm “almost as a happenstance,” let it grow, and sold the business for $500 million. Nothing ventured, nothing gained.

Asset and price figures updated Feb. 16.