Grayscale Liquidation Could Unleash A Bitcoin Armageddon

The FTX Contagion effects do not even stop at the largest institutional Bitcoin product on the market, the Grayscale Bitcoin Trust (GBTC). As a result of the bankruptcy of Sam Bankman-Fried’s crypto exchange, the discount to the NAV of Grayscale’s GBTC fund has fallen to around -40%.

As recently as the end of 2020, GBTC was trading at a premium of +40%. However, in January 2021, the trend reversal occurred when Grayscale’s Bitcoin fund traded at a discount for the first time. Since then, GBTC has been on a downward slide.

GBTC’s largest owners include Cathie Wood’s ARK Invest (0.85%), Horizon Kinetics (0.34%), Simplify Asset Management (0.06%) Systelligence (0.04%), Parkwood (0.04%), Emerald Mutual Fund (0.03%) and Rothschild Investment (0.01%), according to CNN Business.

Recent events have led Grayscale Bitcoin Trust to become potentially the single biggest risk to the Bitcoin market. As NewsBTC reported, Genesis Global had to pause all withdrawals for its lending business on Wednesday due to “unprecedented market turmoil.”

This is concerning for the Grayscale Bitcoin Trust in that Genesis Global served as the liquidity provider for the trust. Genesis Global’s parent company is Digital Currency Group (DCG). This in turn is also the parent company of Grayscale.

Shortly after the Genesis announcement, Digital Currency Group clarified that the matter would have no impact on its own business. DCG stated that Genesis is not a service provider “for any” Grayscale product.

Furthermore, the company asserted that it does not lend, borrow, or pledge Bitcoin, and that its custodian – Coinbase – is prohibited from engaging in such activities. In addition, SEC and OTC markets reports and audited financial statements are filed.

Grayscale products continue to operate business as usual, and recent events have had no impact on product operations.

The assets underlying $GBTC and all Grayscale products remain safe and secure, held in segregated wallets in deep cold storage by our custodian Coinbase .

Still, the community is bellyaching. A dissolution of GBTC could mean Armageddon for Bitcoin. The collapse of Terra Luna, on the other hand, would have been fun.

The Grayscale Bitcoin Trust currently holds 634,000 BTC. The Terra Luna Foundation “only” liquidated 80,000 Bitcoins, and still managed to crash the BTC price from $40,000 to $20,000.

As Ryan Selkis reported, DCG is in a liquidity squeeze. “Appears holding company’s (DCG) liquid assets are below liabilities. As a result, it looks like DCG is looking to raise outside funding”. However, this tweet is now deleted.

The Bitcoin community is now demanding proof that Grayscale actually holds roughly 634,000 BTC in reserve at Brian Armstrong’s Coinbase. However, neither Grayscale nor Coinbase have shown any reaction so far.

All that is currently available is a CSV file that is updated daily. As analyst Dylan LeClair explained, it should be relatively feasible to produce a proof of reserves if all BTCs are held at Coinbase.

Does anyone know of the addresses for the 630k BTC in $GBTC? Are there some form of proof of reserves and if no, why?

We have a fully transparent public ledger so we can audit this stuff.

All I can find is a CSV file that updates daily. Why not publish the addresses?

— Dylan LeClair (@DylanLeClair_) November 17, 2022

But criticism also heads towards the U.S. Securities and Exchange Commission. If chairman Gary Gensler had approved the conversion of GBTC into an ETF, the Armageddon scenario would not even exist.

Instead, Gensler preferred to reject spot Bitcoin ETFs and flood the market with paper BTC. The FTX fiasco may also contribute to the lack of approval for a spot ETF in the near future.

Meanwhile, Chris Burniske, partner at Placeholder and former crypto chief at ARKinvest, tweeted that fears surrounding the unwinding of GBTC and ETHE are unfounded, an example of hysteria.

He retweeted Bob Loukas who wrote that the trust will not go away as it is a money printing machine.

They generate like $700m in fees and investors can’t stop it. […] They could borrow billions against that cash flow.

Also, You’re not killing the goose to save Genesis. They’re fire-walled.

At press time, Bitcoin investors seemed to agree with Chris Burniske. BTC remains in a wait-and-see mode.