Why is Grayscale’s GBTC falling 45% against Bitcoin (BTC)?

Grayscale’s GTBC at 45% off

There is currently a threat hanging over the cryptocurrency market. the Grayscale Bitcoin Trust (GBTC)considered the largest cryptocurrency investment vehicle dedicated to institutional players, seems in bad shape and could collapse.

While it is supposed to be correlated to Bitcoin (BTC), the GBTC is currently at a 45% discount and even passed the 50% mark this Monday morning. It keeps printing lows for several weeks. Concretely, we consider this asset on discount when its price is lower than the NAV (net asset value, here Bitcoin) and in premium when it is higher.

The GBTC discount continues to widen

Launched in September 2013, GBTC is a security that offers investors a way to gain exposure to bitcoin without actually buying it. Money from institutional players is collected and used to buy bitcoins, which are then held in a fund owned by Grayscale.

In other words, it is not the investors who hold the bitcoins, but good Grayscale. Faced with the recent fall of the GBT, many people have begun to question the good management of Grayscale, insinuating that the company wouldn’t actually hold bitcoins.

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Does Grayscale actually hold BTC?

This is the question everyone is asking right now: does Grayscale actually own its bitcoins? For information, the company is supposed to keep 634,000 BTC, or $10.2 billion at the current price. If this were not the case, it would obviously be catastrophic as the risk of contagion on the market is enormous.

In response, the company spoke this Friday, November 18 in a press release titled “Safety, Security and Transparency ”, also posted on Twitter as a thread. The company wanted to reassure its investors:

“The holdings of Grayscale’s digital asset products are safe and secure. Balances are reflected in historical public records and have been assessed by our third-party auditors. »

However, these words did not convince, quite the contrary. In effect, Grayscale does not wish to publicly reveal the addresses holding the bitcoins for “security reasons” which seem difficult to justify. It didn’t take long to set things on fire.

6) Coinbase frequently performs on-chain validation. Due to security concerns, we do not make such on-chain wallet information and confirmation information publicly available through a cryptographic Proof-of-Reserve, or other advanced cryptographic accounting procedure.

—Grayscale (@Grayscale) November 18, 2022

Despite the insistence of investors for a few days, Grayscale confirmed this Monday morning that it would not publish the addresses of its portfolios. Hours later, Coinbase Custody explained regularly review the assets owned by Grayscale via on-chain validations. Not sure that this safeguard is enough to calm the storm.

Coinbase performs regular “on-chain validation” to confirm existence and security of exact amount of #Bitcoin pic.twitter.com/7rbiPq43yZ

— Bitcoin Archive 🗄🚀🌔 (@BTC_Archive) November 21, 2022

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Genesis, CoinDesk, Grayscale: dangerous liaisons

This complicated situation for Grayscale is more generally part of the major crisis that is currently going through Genesis Trading. This company, which had already found itself in difficulty following the debacle of Three Arrows Capital (3AC)recently suspended its withdrawals because of his own exposure to FTX (up to $175 million).

Except that Genesis Trading, like Grayscale (and incidentally Coindesk), is part of the Digital Currency Group managed by Barry Silbert. According to some rumors, the two entities have potentially carried out some operations in order to save Genesisputting Grayscale in an uncomfortable situation.

But it would go even further. As explained before, it has been several months since institutional clients reduce their exposure to cryptocurrencies by selling their GBTC (with a percentage loss, since it has a discount).

This phenomenon is all the more marked by the fall of certain major entities, such as 3AC or BlockFi who had to sell 100% of their positions on Grayscale.

However, it would appear that the Digital Currency Group made the decision to buy the GBTC themselves, thus taking advantage of the reduction, without however modifying the supply of Bitcoin held behind. A manipulation that makes the DCG group largest holder of own investment product.

Grayscale Bitcoin Trust (GBTC) Product Major Investor Chart

However, despite these various operations, the price of the GBTC did not hold. On the contrary, it continues to fall and at the same time drags the positions of the DCG group down. However, faced with the turmoil of Genesis, the group must find 1 billion dollars.

Faced with the current context, it is difficult to imagine that investors would be inclined to lend this amount to DCG. In other words, they will definitely have to sell their GBTCs, accusing the passage of enormous losses. This obviously risks to drastically drop the price of Bitcoin and take it under $10,000.

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Grayscale challenges the SEC

Earlier this year, Grayscale tried to convert the GTBC into an Exchange Traded Fund (ETF), a similar investment vehicle which can be traded on the stock exchange and which tracks the price of a basket made up of one or more assets.

The offer of a Grayscale Bitcoin ETF would notably allow institutional players to redeem their shares, which would have had an impact on the quantity of shares in circulation and would have slowly allowed reduce the price gap between GBTC and BTC.

But all of Grayscale’s attempts have been blocked by the United States Securities and Exchange Commission (SEC), which has so far eliminated all “spot” ETFs (related to the Bitcoin market price). Conversely, the US financial watchdog only allows futures ETFs (linked to derivative contracts on the future price of bitcoin).

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Source: YCharts, Grayscale Release

Journalist for Cryptoast, I strive to dissect every detail of the exciting world of cryptocurrencies and make it accessible and understandable to as many people as possible.

Lilian Aliaga

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