Bloomberg Businessweek - USA (2021-02-08)

 FINANCE Bloomberg Businessweek February 8, 2021

25

Cutting Off the

Cash Pipeline

○ Environmentalistsaresteppinguppressure

onbanksthatfinancefossilfuelproducers

THEBOTTOMLINE Truststhattradeonthemarketlikestocks

canofferexposuretoBitcoin,buttheirsharepricesdon’talways

matchtheunderlyingvalue.

Johan Frijns will tell you that on his best days, he

takes to the streets in the morning in jeans and a

T-shirt to protest climate change, then in the after-

noon dons a suit to visit a bank, where he tells exec-

utives they must do more to combat global warming.

For the better part of two decades, Frijns has

sought to rein in carbon emissions by hitting fossil

fuel producers where it hurts most: their cash pipe-

line. The way to do that, the 55-year-old Dutchman

says, is pressing lenders to cut off funding to coal,

oil, gas, and industrial polluters. “Banks have great

leverage over their clients,” says Frijns, a founder of

BankTrack, a nonprofit that focuses on the role the

finance industry plays in climate change.

Frijns is a pioneer of a fast-growing environ-

mental movement insisting that without restrict-

ing the flow of cash to fossil fuel producers, there’s

little chance the world community can meet the

climate goals of the 2015 Paris Agreement. And

he’s had some notable successes, forcing bankers

to recognize that lending to oil explorers, arrang-

ing share offerings for coal miners, or underwrit-

ing bonds for pipeline operators makes them

complicit in global warming. After pressure from

BankTrack and others, Dutch bank ING Groep NV

and France’s Crédit Agricole SA stopped financing

some coal projects.

But for the people whose fortunes depend on

providing that money, it’s tough to walk away. In

the four years after the Paris accord, major banks

arranged $2.7 trillion in financing for legacy energy

companies, according to a report co-authored by

BankTrack. Fees those clients paid to the top 12

global financial houses doubled last year, to $4.2 bil-

lion, consulting firm Coalition Development Ltd.

estimates. “If you keep funding fossil fuels, you’re

building up a climate problem,” says Louise Rouse,

a former banking lawyer who advises environmen-

tal groups such as Greenpeace.

Rouse compares today’s financing of tradi-

tional energy to the complex mortgage-backed

willing to overpay. But the dislocation can go both

ways. “What might be a premium—and a pretty sig-

nificant premium at one point—can quickly reverse

and become a sizable discount when people begin

selling, and it doesn’t take a whole lot of selling pres-

sure given that you don’t have that pressure release

valve,” says Ben Johnson, Morningstar Inc.’s global

director of ETF research.

Grayscale’s price-to-NAV gap has narrowed recently,

as Bitcoin pulled back from a record above $40,000

per coin to around $35,000. It never turned negative.

But if it did, an investor who wanted out of the trust

would be selling a share for less than the cost of the

Bitcoin it represents. And the fund doesn’t have to

fall into a discount to potentially exacerbate losses—a

narrowing of the premium could have a similar effect.

Demand for crypto exposure sent $3 billion to

Grayscale Investments’ products in the fourth quarter,

the bulk of which was absorbed by Grayscale Bitcoin

Trust, the company said last month. Meanwhile,

the Bitwise 10 Crypto Index Fund has already

gathered more than $700 million in assets after its

mid-December debut, according to data compiled

by Bloomberg.

As Bitcoin has boomed, Grayscale has tried to

keep pace with demand by issuing more shares. Yet

even as it sold shares to push the total to 684 mil-

lion, from 278 million a year ago and just 174 mil-

lion at the height of 2017’s mania, it wasn’t enough

to keep the price from swelling above its underly-

ing value. And now the massive issuance has the

potential to exacerbate a supply-demand imbal-

ance in the event of a selloff.

Grayscale Chief Executive Officer Michael

Sonnenshein says he doesn’t anticipate that the

Bitcoin trust’s price would sink meaningfully below

that of its holdings in such a scenario. Grayscale

Bitcoin Trust’s lone instance of a discount occurred

in March 2017. “In the five-plus years that this prod-

uct has been trading in the public market, Bitcoin

has gone through no shortages of bubbles and

bursts,” Sonnenshein says. “The demand for access

for Bitcoin through a titled security has remained

a very, very popular means.”

James Seyffart of Bloomberg Intelligence says a

meaningful discount would likely attract bargain

hunters. Even without the traditional arbitrage,

that natural demand for shares would eventually

realign prices, he says. Before that happened,

though, traders who bought in when Bitcoin was

high and fund share prices were even higher could

go through a lot of pain. —Katherine Greifeld

○ Frijns