Bitcoin armageddon risks with Grayscale liquidation

Key points: 

• Grayscale’s GBTC fund’s NAV discount has narrowed to around -40% due to the bankruptcy of FTX. 
• Genesis Global (the trust's liquidity provider) had to suspend all payouts from its lending business on Wednesday due to “unprecedented market volatility.”
• The Grayscale Bitcoin Trust currently holds 634,000 BTC. For comparison, the Terra Luna Foundation liquidated "only" 80,000 BTC but still managed to crash the BTC price from $40,000 to $20,000.
• The Bitcoin community is now demanding proof that Grayscale actually reserves around 634,000 BTC in Coinbase. However, neither Grayscale nor Coinbase has shown any reaction so far.
• However, GBTC generates $700m in fees, so there should be enough effort to save that. For now, investors agree that BTC is in a wait-and-see mode. 

The FTX contagion also extends to the most significant institutional Bitcoin offering on the market, the Grayscale Bitcoin Trust (GBTC). Grayscale’s GBTC fund’s NAV discount has narrowed to around -40% due to the bankruptcy of Sam Bankman-Fried’s crypto exchange.

GBTC was trading at a +40% premium by the end of 2020. However, this trend reversed in January 2021, when Grayscale’s Bitcoin fund sold at a discount for the first time. Since then, GBTC has been on a downtrend.

Key owners of GBTC include Cathie Woods ARK Invest (0.85%), Horizon Kinetics (0.34%), Simplify Asset Management (0.06%), Systellence (0.04%), Parkwood (0.04%), Emerald Mutual Fund (0.03%) %) and Rothschild Investment (0.01%), CNN Business reported.

Doomsday for Bitcoin

Recent events have made Grayscale Bitcoin Trust potentially the biggest risk in the Bitcoin market. As reported, Genesis Global had to suspend all payouts from its lending business on Wednesday due to “unprecedented market volatility.”

This concerns Grayscale Bitcoin Trust, as Genesis Global is the trust's liquidity provider. Genesis Global's parent company is Digital Currency Group (DCG). This in turn is 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 states that Genesis is not a service provider for "any" Grayscale products.

Additionally, the company claims that it does not lend, borrow, or pledge Bitcoin and that its custodian, Coinbase, is prohibited from doing so. Additionally, SEC and OTC market reports and audited financial statements are on file.

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 thinking. The dissolution of GBTC could mean the end of the world for Bitcoin. On the other hand, the collapse of Terra Luna would be interesting.

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

As reported by Ryan Selkis, DCG is in the midst of a liquidity crunch. "It appears that the holding company (DCG) has less cash than liabilities. Therefore, it appears that DCG is looking to raise external funding." However, the tweet has since been deleted.

The Bitcoin community is now demanding proof that Grayscale actually reserves around 634,000 BTC in Brian Armstrong’s Coinbase. However, neither Grayscale nor Coinbase has shown any reaction so far.

Currently, only daily updated CSV files are available. As analyst Dylan LeClair explained, if all BTC is stored in Coinbase, then providing proof of reserve should be relatively feasible.

Criticism is also aimed at the U.S. Securities and Exchange Commission. If Chairman Gary Gensler agrees to convert GBTC to an ETF, the doomsday scenario wouldn't even exist.

Instead, Gensler prefers to reject spot bitcoin ETFs and flood the market with paper BTC. The FTX fiasco may also help prevent spot ETF approvals in the near future.

Meanwhile, Chris Burniske, Partner at Placeholder and former head of crypto at ARKinvest, tweeted that concerns surrounding the GBTC and ETHE resolutions are unfounded, an example of hysteria.

He retweeted a tweet from Bob Loukas, who wrote that trust will not disappear because it is a money-making 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 appear to agree with Chris Burniske. BTC is still in wait-and-see mode.