Problems for Grayscale: is it the same situation as FTX’s bankruptcy?

It is scary to compare it to the FTX bankruptcy, but Grayscale Bitcoin Trust (GBTC), has recently lost 43% of its value. It is currently consistently trading at a steep discount to the spot Bitcoin price it holds. The proposed solution is a facilitative Regulation M filing with the SEC. 

What is Grayscale? Is it really linked with the FTX fiasco?

Grayscale Bitcoin Trust (GBTC) is an online platform, which offers a range of services and offerings regarding Bitcoin. In essence, we are talking about investment vehicles for investing in Bitcoin through securities linked to the trust. An alternative to traditional investments. 

This is a financial product that allows investing in digital currencies. They reference the shares of the Grayscale Bitcoin Trust, reflecting Bitcoin prices. The product turns out to be approved by the SEC, the US financial market regulator, and allows exposure to the BTC market even for those investors who cannot invest in unregulated markets or assets. 

This facility made its debut on 25 September 2013 under the name Bitcoin Investment Trust, in the guise of a private placement for accredited investors. It also obtained FINRA approval for publicly tradable eligible assets.

It is not an ETF, but still mimics its formula. Specifically, the issuing company cites the SPDR Gold Trust as its model, thus an ETF with a physical underlying.

GBTC has a capitalization of more than $2.6 billion. The minimum investment required is $50,000, with a 2.0% annual fee that accrues day by day.

It safely stores BTC, given that buying, selling, and exchanging involves shares and not Bitcoin. The latter are instead stored in a security system with high standards and insured. The Grayscale Bitcoin Trust product is available like any US instrument and is tradable through a brokerage firm.

The biggest criticism of this financial instrument concerns the payment of high premiums and fees, but this is due to the fact that, as the only fund of its kind to date, investors are charged a high premium. Still, it remains a market with limited trading volumes, recently hovering around $8 million daily. So, they have not attracted a significant number of institutional investors.

Grayscale refuses to release on-chain evidence of its crypto reserves

Through a Coinbase Custody letter, the investment firm shared how each of its crypto products is hedged, but the thing that caused a stir was the fact that they would not provide the addresses of the wallets. This has created a maelstrom of concern among investors, especially in such a climate, at a time when transparency is the basis of the relationship between company and investor. The influence of FTX and Sam Bankman Fried led to the connection of Grayscale Bitcoin Trust’s (GBTC) problems with the failing company FTX. 

The investment company was quick to justify itself, clarifying that the decision was made in order to avoid security problems. The company said that cryptocurrency exchange Coinbase, used by Grayscale as a custodian of capital, frequently performs “on-chain validations,” explaining that sharing proof of their reserves could cause security risks.

“Coinbase often performs on-chain validation. For security reasons, we do not make on-chain wallet information and confirmation information public through a cryptographic Proof-of-Reserve or other advanced cryptographic accounting procedure.”

He also held to differentiate FTX’s situation with that of Grayscale: 

“panic triggered by others is not a sufficient reason to circumvent the complex security arrangements that have kept our investors’ assets safe for years.”

Grayscale’s move was not one of the best since the strain on crypto companies is very high, especially when it comes to transparency. Investors are aiming for more transparency, and want to introduce proof of reserves at all costs, after the problematic liquidity events of FTX.  

After the recent drop, is there a liquidation risk for GBTC?

If forced to liquidate, Grayscale would engage directly with Bitcoin exchanges or over-the-counter Bitcoin markets to liquidate the trust’s Bitcoin as quickly as possible, getting the best possible fair value, all according to SEC disclosures.

The problematic situation at cryptocurrency loan manager Genesis has halted customer repayments and new loan orders. It is not known how Genesis and Grayscale have such a deep connection.  

All digital assets in Grayscale’s products are held by Coinbase Custody Trust Company, the company said in a blog post Friday. The documents governing each offering prohibit the assets from being lent or borrowed, they added.

“The custody of digital assets underlying Grayscale’s digital asset products is unaffected, and the digital assets in our products remain safe and secure.”

Grayscale and its team stated.