Is GrayScale A Ticking Bomb?

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In a year full of traumatic events for cryptocurrencies, no one can help but look for the next big debacle. Currently, all eyes are on GrayScale for the worst possible reason. Could GrayScale be the next big hit that sinks the market? 

Can GrayScale Fall?

GrayScale is a gigantic company. However, it has recently been embroiled in rumors. First, GrayScale had been said to be insolvent until Coinbase confirmed that they held 635,000 GBTC bitcoins

However, this still presents a problem for many. According to UBS, a Swiss bank, this would pose a considerable problem for the market. 

GrayScale's BTCs are equivalent to $11B, approximately 3.3% of all BTC mined to date. Without GrayScale liquidating its bitcoins, the hit to the market would be too great. 

But why would GrayScale liquidate its largest asset? Well, it all has to do again with the fall of FTX.

Digital Currency Group (DGC), GrayScale's parent company, has been in the spotlight since the FTX crash. At the outset, Genesis Global Capital, part of Digital Currency Group, reported a $175M exposure to FTX. Shortly after, they announced they would have to raise $1B in funding to continue operations. After that, they said they would only need $500M. 

All in all, Digital Currency Group is trying to raise funds as soon as possible.

And this is where its GrayScale holdings could break the market.

DGC is the largest shareholder of the GrayScale Bitcoin Trust Fund, with almost 10% of the shares. Currently, that slice of DGC is worth about $600M. This, however, is dwarfed by the current market for those shares. Over the last 30 days, the average daily volume has been $6.85M — a tiny fraction of the large pie of DGC shares.

A large sell-off would plummet the value of GBTC and, with it, the crypto market price.

How likely is this scenario? Very unlikely to be fair.


A Counter-Scenario: What If Everything Is Okay?

GrayScale exposes its clients to bitcoin and other crypto products without requiring them to hold the asset. But they are not an exchange. The customer buys shares with some disparity between the trading price and the net asset value (NAV).

In 2021 the market crash began, and GrayScale started trading at a discount for the first time. The current discount is 42.25% at the time of writing. People like Cathie Wood are betting this discount will disappear soon — probably close to the next bitcoin halving.

If so, they will make money not only on the shares going up but on the discount getting closer to the NAV. 

SEC filings do not suggest that there may be a dissolution or obligation to dissolve soon, either. 

If so, DGC would have to liquidate its BTC at a discount to receive the underlying cash. This would make little sense for the firm, as they get about $210M a year from GBTC management. If they liquidate, they will receive under two years of management fees.

It doesn't seem like DCG plans to liquidate its position, and GrayScale will be the market's new victim. It all depends on whether they remain sufficiently liquid. Will they achieve the liquidity they need to stay in business? We can only hope it does soon. For now, it's best to proceed with caution. We hope GrayScale is safe, as Coinbase stated.


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