In this episode of the Stacks Podcast, Jeff Dorman, CIO of Arca joins Luke to discuss what is happening at Grayscale and the messy situation is broken down in simple terms.
Read our notes below to learn more.
Intro
Luke Martin has returned after a break and is discussing the current state of crypto.
Many tokens have sold off significantly, and there are questions about the direction of the macro market and the stability of various firms.
The Gray Scale Fund, the largest Bitcoin fund in the world is facing challenges.
Winklevoss twins (founders of Gemini CEX) have claimed they are owed $900 million.
There are speculations about the fund's ability to convert to an ETF and concerns about insolvency.
What the Hell is Happening at Grayscale?
Grayscale is a digital currency investment company that is a subsidiary of Digital Currency Group (DCG).
Grayscale is known for being a profitable business, earning a 2% management fee on the net asset value of its funds but has not performed as well as $BTC.
The current issue facing Grayscale and DCG is the financial struggles of another DCG subsidiary, Genesis which has caused speculation and criticism.
This has led to finger-pointing at Grayscale and DCG as bad actors even though they are perceived as strong businesses.
What Went Wrong?
The issue with Grayscale is not the company itself, but rather the way it has been used by Genesis, DCG, BlockFi and 3AC.
Investing in Grayscale's products such as $GBTC results in the investor's money being locked in and unable to be withdrawn leading Grayscale to prioritize attracting more money rather than maximizing returns for shareholders.
Companies like 3AC have been incentivized to inflate Grayscale's assets by borrowing Bitcoin from Genesis and converting it into GBTC resulting in a complex web of connections between the companies.
Bailing Genesis out of bankruptcy affects DCG and the possibility of a new manager for Grayscale's trust.
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50% Discount on $BTC and 60% Discount on $ETH on Grayscale Products
Grayscale products are fully broken and not tracking the underlying at all.
It only becomes unbroken in the event of a market crash or disillusion event.
The product is designed to make Grayscale rich and everyone else poor.
Did Grayscale Cause the Collapse of 3AC?
Grayscale products may have contributed to the collapse of several funds.
However, it is not solely the fault of Grayscale products and the individuals who made poor decisions with them should not be absolved.
What are the Scenarios that could happen With Grayscale?
Grayscale and DCG tweeted about a potential tender offer for $GBTC but there is currently no mechanism in place to do so.
It would require selling the Bitcoin in the trust and using the proceeds to buy back $GBTC, which would need SEC approval and is essentially the same as a redemption.
The tweet was likely an effort to calm the markets due to Grayscale's significant financial losses from owning a large portion of $GBTC.
It is uncertain if a conversion to an ETF will occur and, if it does, it would be disastrous for Grayscale and it would likely lose the majority of its assets.
The decision on an ETF will not be up to Gray Scale and they may need to convert or dissolve the trust.
What Should Traders Be Looking For if the Discount Gets Worse?
Individuals can now invest in Bitcoin and other cryptos through other ways such as Coinbase.
The current discount on Grayscale assets may not make sense intuitively but can be understood by considering the potential return or yield based on the expected timeline for conversion to an ETF.
What Should People Focus on?
The market typically experiences a selloff before bankruptcies and a rally after due to companies trying to shore up their liquidity before filing for bankruptcy and then stopping the selling once they have filed.
Auditing and proving control of assets and private keys can take a long time leading to a guilty-until-proven-innocent mentality in the market.
The current focus is on macroeconomic factors such as employment and retail sales.
Is the Crypto Bottom In?
The crypto market is at or near the bottom, due to the fact that most assets are doing well and the industry is small, with little room for further declines.
There are few sellers left in the market and those who remain are not likely to push prices down further.
The market may have already reached its bottom and there is a potential for recovery in the near future.
Check Out These Important Links
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Click the link below to unlock the true power of interoperability.