Prior to the recent events surrounding crypto-currency exchange FTX, it may not have been widely known that Grayscale is owned by Digital Currency Group (DCG), a company that also oversees the operations of crypto-currency lender Genesis.
After the demise of the Sam Bankman-Fried (SBF)-led crypto-currency platform, Genesis encountered liquidity issues stemming from an ongoing crisis dating back to the collapse of Terra (LUNA) and Three Arrows Capital (3AC). As a result, the institutionally-focused crypto broker has not been able to respond to withdrawal requests from clients who were concerned about contagion from the FTX crash.
Due to the $175 million exposure of assets to the failed crypto-currency exchange, Genesis was forced to file for bankruptcy on January 19, 2023. Currently, the company holds about $150 million in cash, and it believes that this liquidity will allow it to maintain its business operations and facilitate the restructuring process.
This has caused considerable concern about the potential negative impact on Grayscale, given that it is owned by the same group. However, the asset manager said that the regulatory framework in place for it and its entities reduces the likelihood of a scenario similar to FTX.
Could Grayscale go bankrupt?
It is essential to recognize that the purpose of this content is not to spread FUD about the crypto-currency market, as it is already abundant. The intent is to provide a factual analysis of recent events, to serve as a source of information, and to assist in making informed decisions.
Grayscale owns one of the world’s leading Bitcoin (BTC) funds, GBTC. This fund offers traditional investors the opportunity to gain exposure to the crypto-currency market without the need to buy BTC directly. GBTC operates similarly to a traditional Exchange Traded Fund (ETF), in which individuals can purchase units of the fund, which are based on the value of bitcoin.
However, amidst the events that transpired towards the end of 2022, there was speculation that Grayscale could face liquidity issues due to the potential sale of GBTC shares by investors in response to the decline in the value of bitcoin. These rumors have raised concerns about the company’s ability to meet its financial obligations and the overall well-being of the fund.
A red flag was raised when Grayscale announced in November that, for security reasons, it would not proceed with a much-anticipated proof of reserves in the crypto-currency market, unlike other major players in the sector.
It should be noted that while Coinbase, as the custodian of Grayscale’s bitcoins, performs regular validations, it does not reveal addresses or any other confidential information, in order to keep its products safe.
Another concern is that Digital Currency Group (DCG), Grayscale’s parent company, has a substantial stake in GBTC. This can potentially lead to conflicts of interest within the company and implies that DCG has a significant level of exposure to the risks associated with this investment, which may not be in the best interest of the overall health of the group.
Power of self-defense
Grayscale’s offerings are a valuable tool for investors new to the market, who may not yet be familiar with portfolio management. However, it’s important to note that entrusting the custody of one’s crypto-currencies to a centralized company can carry risks. This is confirmed by the experience of FTX clients.
It remains to be seen whether Grayscale will face similar financial difficulties as Genesis. However, it is clear that this situation underscores the importance of investors conducting thorough research, developing a solid understanding of the fundamentals of bitcoin, and recognizing the importance of having one’s private keys.
It is also crucial to note that when investing in GBTC, one cannot exchange it for an equivalent amount of Bitcoin, which can lead to the creation of two separate markets. In the event that Grayscale experiences financial difficulties and declares bankruptcy, it is possible that many investors’ funds will be frozen, leading to further disruption in the crypto-currency market.