Grayscale trust selling at huge discounts indicates investor bearishness as fears of a possible DCG insolvency grow.
At press time, Grayscale’s Bitcoin Trust (GBTC) is trading at a 43% discount to its asset value, at about $9,562 per Bitcoin, compared to the current market valuation of about $16,813.
Similarly, its Ethereum Trust (ETHE) is trading at a 41% discount, at about $718 per Ethereum, compared to the current market valuation of about $1,219.
Notably, both indicate significant investor bearishness. Moreover, speculation suggests that it comes as fears about the health of Digital Currency Group, the parent company of Genesis Trading and Grayscale, grow.
DCG Solvency Concerns
It bears mentioning that Genesis Trading, a crypto lending platform for several central exchanges, including Gemini, has suspended withdrawals as it is currently going through a liquidity crisis.
The firm had $175 million locked on the now-bankrupt FTX exchange. However, DCG stepped in with a $140 million equity infusion last Friday, per a report by The Block. But it appears it was not enough to keep the lender afloat, as it has gone on to halt withdrawals this week.
According to a Wall Street Journal report, Genesis wants to raise $1 billion by Monday to meet client demands. Per the report, the liquidity crisis results from illiquid assets on its balance sheet.
Consequently, users are beginning to question DCG’s health.
North Rock Digital founder Hal Press believes these concerns are valid in light of the required $1 billion loan request. Notably, according to Press, Genesis is not worth that amount. Consequently, he believes that the liability rests with DCG.
“The answer is that the liability sits with DCG, and DCG is now at risk,” he writes. “Furthermore, it’s not clear they are worth enough to raise the 1B by Monday, and that’s the issue. What a mess.”
@0xSisyphus says in the worst case, the company has a hole it can not fill and may have no choice but to dissolve the Bitcoin and Ethereum trusts.
Notably, per Grayscale’s Form 10-K filing with the US Securities and Exchange Commission, in the case of a dissolution of the Trust, shareholders can receive a distribution in USD or the actual digital currency. However, the decision is at the discretion of the sponsor.
If precedent is anything to go by, a distribution in USD resulting from the sale of digital assets is likely. For example, as one user points out, when Grayscale dissolved its XRP trust in light of the SEC lawsuit against Ripple, it liquidated its XRP holdings and distributed cash proceeds to shareholders.
Grayscale currently holds about 633.7k BTC ($10.57 billion) and 3.05 million ETH ($3.68 billion) per Coinglass data. Consequently, it could be catastrophic for the crypto markets.
However, several pundits believe this outcome is unlikely. For example, analyst Alex Krüger asserts that such action will also hurt DCG, and it is thus not in their interest to do so.
Meanwhile, Financial Times Crypto editor Jeff Roberts says that the regulatory hurdles of dissolving the Trust may be too cumbersome. So instead, he believes the company may sell crypto media and news platform CoinDesk to raise the capital in the time required.
The crypto market remains in general uncertainty as the FTX contagion unravels.