Grayscale liquidation could unleash a Bitcoin Armageddon

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

As recently as late 2020, GBTC was trading at a +40% premium. 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 holders include Cathie Woods 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.

Doomsday for Bitcoin

Recent events have made Grayscale Bitcoin Trust 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 of concern to the Grayscale Bitcoin Trust in that Genesis Global acted as a liquidity provider for the trust. Genesis Global’s parent company is Digital Currency Group (DCG). This is again also the parent company of Grayscale.

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

Furthermore, the company claimed 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 market reports and audited financial statements are filed.

Grayscale products continue to operate as normal and recent events have not had any 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.

Nevertheless, society has the guts. A dissolution of GBTC could spell Armageddon for Bitcoin. The collapse of Terra Luna, on the other hand, had been fun.

Grayscale Bitcoin Trust currently has 634,000 BTC. The Terra Luna Foundation liquidated “only” 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 crunch. “It appears that the holding company’s (DCG) liquid assets are below debt. As a result, DCG appears to be looking to raise external funding. However, this tweet is now deleted.

The Bitcoin community is now demanding proof that Grayscale actually has approximately 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 possible to produce a proof of reserves if all BTCs are held on Coinbase.

Does anyone know the addresses of the 630k BTC i $GBTC? Is there any evidence of reserves and if not, why?

We have a fully transparent public ledger so we can audit these things.

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

— Dylan LeClair 🟠 (@DylanLeClair_) 17 November 2022

But the criticism is also aimed at the US Securities and Exchange Commission. If Chairman Gary Gensler had approved the conversion of GBTC to 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 head of crypto at ARKinvest, tweeted that the fears surrounding the liquidation of GBTC and ETHE are unfounded, an example of hysteria.

He retweeted Bob Loukas as wrote that trust will not go away as it is a money printer.

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

Also, you don’t kill the goose to save Genesis. They are firewalls.

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