Grayscale’s Digital Holdings
Grayscale’s digital assets are subject to legal frameworks that prevent them from being borrowed, lent, or encumbered. The company has paused new loan originations and redemptions.
Each digital asset product is structured as a “separate legal entity” and stored under Coinbase Custody Trust Company. Grayscale is responsible for and transparently reports the tokens held under Coinbase, which currently includes 635,235 Bitcoins.
Grayscale has also announced it will not disclose proof of reserves to customers. Security concerns have led the company to withhold on-chain wallet information and cryptographic Proof-of-Reserve or any other advanced cryptographic auditing methods.
The Collapse of FTX and Grayscale Bitcoin Trust
The unexpected collapse of FTX shocked the crypto world, demonstrating how a once-trusted exchange can fall from grace in just a week. This event had significant repercussions for several crypto projects.
Grayscale attempted to assure investors and the market that its flagship product was financially resilient. However, GBTC has been struggling with trading at a steep discount to Bitcoin’s spot price, approaching a 50% gap.
Grayscale is facing difficulties in its attempt to convert GBTC into an exchange-traded fund (ETF). The FTX scandal, coupled with the discovery of missing customer funds, has highlighted the pressing need for proof-of-reserve audits. While Grayscale insists that it has safeguarded its assets over the years and maintains a solid reputation for security, the lack of transparency in reserves continues to be an industry concern.
With its fund structure lacking investor-friendly features and GBTC not being a proper ETF, Grayscale’s dealings have been adversely affected by the current Bitcoin prices. These issues mean that Grayscale underperforms compared to Bitcoin, largely due to the absence of a fully functional Bitcoin ETF.
Is it Business as Usual for Grayscale?
Despite the mounting concerns within the crypto industry, Grayscale asserts that everything is functioning smoothly and reassures investors that its assets are safe and secure. However, Grayscale’s potential liquidation could have severe implications for the crypto market due to its connections with FTX. Its largest shareholder, DCG, holds a 4.1% stake, while the second-largest shareholder is BlockFi, which filed for bankruptcy after being heavily exposed to FTX. This ongoing situation continues to raise alarms within the crypto community.
With the possibility of Bitcoin prices continuing to drop, the dissolution of Grayscale could exert downward pressure on Bitcoin prices and impact its supply. Grayscale maintains that it is not in business with Genesis, despite rumors about its continued operations. Meanwhile, the gap between GBTC’s discount and the underlying Bitcoin price continues to widen, contributing to the stress in crypto markets.
SEC’s Rejection of Grayscale’s ETF Conversion Attempt
Recent events prompted Grayscale to seek restructuring into an ETF, but the SEC rejected this proposal, citing concerns over Grayscale’s vulnerability to fraud and manipulation. The SEC’s refusal stems from its lack of clarity about the origins of Bitcoin and its belief that converting to an ETF would bring the share price in line with its true value. Some speculate that Grayscale may file a lawsuit against the SEC over this decision.
Bitcoin’s price remains volatile, highlighting the risks associated with cryptocurrency investments. In the previous year, the fund ranked in the bottom 6% of stocks in terms of price performance, and its value has dropped by nearly 73% as the market adjusts to the fund’s challenges.
The Grayscale Bitcoin Trust Fund directly impacts Bitcoin’s price, with its shortcomings aligning with a sharp decline in Bitcoin’s value.
