Anxious 2023: what threatens the fall of the largest holder of bitcoins – the GBTC fund

Amid the collapse of FTX, fears of a domino effect are growing in the form of the fall of many other industry players, including the largest cryptocurrency funds. Is there a threat of ruin for GBTC holding more than 600,000 BTC? The consequences of the collapse of FTX were felt for the cryptocurrency industry, but the expectations of a series of bankruptcies were exaggerated. Even despite the lawsuit against the founder of the bankrupt exchange Sam Bankman-Fried and his closest associates, bitcoin has been trading steadily in the range between $16,000 and $18,000 since November 10. Neither continued attacks from regulators and major banks, nor a serious drop in trading volumes unsettled him.. However, exit from any range sooner or later occurs. Where will bitcoin go? Even if the whole mass of negative news failed to break through the support levels, it means that bitcoin still has a high growth potential.. The absence of a serious negative will encourage the most courageous traders to switch to purchases.. To return to sustainable growth, the mood of the majority of investors needs to improve. But what dangers can still lie in wait for bitcoin, besides those already realized? One of the most stable instruments in the cryptocurrency market is regulated trust and exchange-traded funds.. Their total value is only a few percent of the cryptocurrency market capitalization.. However, these are SEC-regulated players in the traditional financial market, so they are more trustworthy than most cryptocurrency exchanges. The largest operator of cryptocurrency funds is the American company Grayscale. This is not a public company, and only a few thousand large investors hold shares of its funds.. Moreover, the capitalization of Grayscale funds is an order of magnitude higher than all other funds combined.. Last year, Grayscale tried to convert GBTC into a publicly traded ETF, but the SEC refused, citing Bitcoin's too high volatility and the influence of Tether.. After that, Grayscale even sued the regulator. Grayscale, like the largest exchanges, can be attributed to the backbone players in the cryptocurrency industry. Barry Silbert's company has existed since 2013 and enjoys well-deserved trust as one of the most stable. Consequently, its bankruptcy will be even more devastating than the collapse of FTX.. And given the company's reserves in major cryptocurrencies, the closure of its funds in terms of effect on stock quotes could even surpass the collapse of Binance. How GBTC and other crypto funds work First, let's look at the financial basis of the oldest cryptocurrency trust. How are its profits or losses generated? What are the risks of the fund operator and shareholders, and how can they realize the profit, if any? GBTC and trust funds for other cryptocurrencies are managed by Grayscale Investments, registered in the US state of Delaware. This is one of the most favorable jurisdictions for cryptocurrency companies in terms of taxation.. The fund was launched in September 2013. Grayscale's total assets under management are more than $15 billion, placed in sixteen funds, both for one cryptocurrency and for portfolios of cryptoassets. Of these, the largest are GBTC (Bitcoin) and ETHE (Ethereum). The value of GBTC assets at the close of Friday December 30 is $10.49 billion, ETHE is $3.633 billion. The discount price of bitcoin in fund units is calculated using the Coindesk index. GBTC (or its investors) owns 635,235.84 BTC and held 644,809.97 BTC as of early 2022. Thus, in nine months, Grayscale sold about 9,574 BTC on the market.. These are not direct sales, but a withdrawal in favor of the fund operator to pay a commission. At the end of 2022, GBTC remains the largest active Bitcoin holder in the world, second only to Satoshi Nakamoto, whose coins have not moved since 2009. The fund owns more than 3% of the maximum possible amount of BTC, even on a global scale this is a serious figure. Grayscale itself does not store cryptocurrencies, outsourcing this function to the largest platform in the US – Coinbase. Of course, they are not on the exchange, but in a special custodial service, that is, in cold storage. However, after the crash of FTX in November, Grayscale refused to publish information about its reserves, citing the reliability of Coinbase services and the control of the regulator.. To a certain extent, this is justified, since the reserves on cold wallets cannot be controlled online, and Grayscale reports publish the amounts of bitcoins in storage.. Yet outright rejection did not inspire investors. Regardless of the fund's performance, 2% of the value of the assets goes to the parent company Grayscale Investments annually as a maintenance fee. In the ETHE Ethereum Fund, the cost of maintenance is even higher – 2.5% per annum, although its capitalization is three times lower than that of GBTC. By comparison, traditional equity and commodity ETFs typically have annual maintenance fees in the range of 0.1%-0.5%, and even riskier “bundled products” rarely go beyond 1% per annum. Barry Zilbert lives on these 2%. Even after a fivefold drop in the underlying asset from the highs, 2% of $10 billion is not such a bad amount, right? The annual profit from servicing ETHE is more modest and amounts to about $100 million. And for a record-breaking 2021, Grayscale's guaranteed return on GBTC alone exceeded $400 million.. In general, everything is standard. Profit (minimum guaranteed 2%) is received by the fund operator, and the exchange collects its commission. All risks are borne by investors. Just like with any other stock market instruments. After the purchase of units, the profit or loss of the investor in the future depends entirely on their market price.. You can close a position only by selling shares in the secondary market. The Fund Operator is under no obligation to redeem units or compensate for losses. When bitcoin rises, and since the launch of the fund it has grown more than 100 times, investors are doing well. They can sell shares on the open market and exit with a profit. But in a prolonged bear market, weighed down by political instability, the liquidity of such risky instruments decreases, and the price may fall faster than the price of the underlying asset.. The investor has little choice: sell shares at the current price or wait. It is even more difficult for large holders to exit without increasing the drawdown. Interestingly, even if bitcoin falls to $1, Grayscale itself will only lose potential profits, because bitcoin is nominally owned not by the operator, but by investors.. And they will bear all the losses. Moreover, in the current market, which is teetering on the brink of panic, it will be more profitable for investors to close the fund than to sell it at the current price, since GBTC units are denominated in bitcoins, not in dollars. Buy bitcoin at half price No, this is not an advertisement. It is really possible if you have the status of an accredited investor in the USA and you are ready to invest from $50,000. But there is one caveat. Grayscale's bitcoins are real, but only derivatives backed by them are traded on the market. The closest analogue is depersonalized accounts for precious metals instead of physical bullion. It is possible to receive the underlying asset only if certain conditions are met. The strangest and even disturbing circumstance is the largest discount to the price of shares in relation to their security in the entire existence of Grayscale funds.. According to Grayscale itself, the current price of one GBTC unit on the day of publication is $7.9, and the market price of the bitcoins that back it is $15.15.. Thus, Bitcoins backed by GBTC can be bought for as little as 53% of their market value! Ether is even worse.. One share of ETHE is worth $4.73 on the OTC market, and the corresponding coins in the vault are worth $11.71. That is, you can buy ETH in Grayscale shares for only 40% of the market price! There are no such discounts in a conditional normal market.. A similar situation was observed, for example, before the collapse of the BTC-e exchange. Cryptocurrencies, the withdrawal of which was closed, were traded at first two to three times cheaper than the market price, and just before the crash, already five to ten times cheaper. There can be two reasons for such a low valuation of Grayscale units, and they can work together: Expectation of a further fall in cryptocurrencies. When buying GBTC units, you are not buying bitcoins, but a derivative instrument equivalent to them. In a stable market, the share price is close to the collateral price, but during periods of turbulence, both up and down deviations are possible. You can sell units on the secondary market at the current price, but you can’t get “live BTC” for them. This is only possible in the event of liquidation of the fund or by individual agreement with Grayscale. Therefore, investors who expect the fall of cryptocurrencies, include this decline in the future value of GBTC units. Suspicions of Grayscale instability. If Grayscale goes bust or closes the funds for any other reason, the fund's bitcoins will be transferred to the fund's holders “as is” or sold on the market. But since this event will in any case cause a strong drawdown of bitcoin, and the process may be delayed, investors also include risks in the market value of shares. Clearly, there are more pessimists than optimists right now.. And they believe in ETH less than in BTC. The discount in the price of Grayscale shares is an indirect, but quite reliable indicator of the mood of American investors. And not a “retail herring”, since the minimum entry threshold at $50,000 for BTC and $25,000 for ETH cuts off small players. You also need to understand that when the fund is liquidated due to the bankruptcy of the company, there is a risk of not receiving all the bitcoins due.. In the process of bankruptcy, the shareholders join the ranks of other creditors of the operating company. In case of a high leverage, the remaining assets, primarily the provision of funds, will be diluted by the company's other liabilities.. Who will have priority – only the court will determine. Other Cryptocurrency Funds For comparison, here are a few more relatively popular bitcoin funds. But, as mentioned above, all of them combined are worth much less than one GBTC. ProShares Bitcoin Strategy ETF. Traded in the US under the ticker BITO, based on CME futures denominated in bitcoin. Simply put, it is a derivative of a derivative. So far, freely traded bitcoin ETFs can only exist in the US market in this form. The ProShares fund is the second in terms of capitalization after GBTC, it is $1.3 billion. Bitwise 10 Crypto Index Fund. Another fund from a company that has been fighting for the launch of a direct Bitcoin ETF for several years. But for now, it has to settle for virtual index funds with no direct collateral. BITW is based on the price indices of the top ten cryptocurrencies, with Bitcoin accounting for over 60%. The current capitalization of the fund is about $810 million. Valkyrie Bitcoin Strategy ETF. Fund from a large investment company, little known in the cryptocurrency market. Through it, only $47.9 million was invested in bitcoin. The fund is also based on CME futures. Interestingly, this week Valkyrie announced their desire to become the managing sponsor of GBTC, but there is no response from Barry Silbert yet.. At the same time, the company promises to reduce the commission for managing the fund from 2% to a more than market 0.75%. Of course, there are many more different funds in the cryptocurrency industry, but they are mostly located in offshore jurisdictions.. And most regulated funds are based not on the cryptocurrencies themselves, but on the shares of companies operating in the blockchain industry. Impact of Grayscale fund closures If Grayscale closes its two main funds, more than 3M ETH and more than 630,000 BTC will enter the market. With the current low liquidity and negative expectations, the appearance of such a huge amount on free sale can provoke a real collapse. There are hardly many optimists with money ready to buy back more than 600,000 BTC. And if they are pragmatic, they will prefer to buy more bitcoins at a low price. If the potential Binance crash hits the broader community, affecting millions of traders, then the GBTC and ETHE shutdown will be more targeted but more powerful. There will be no mass moaning in all social networks, rallies of bankrupt traders and hundreds of lawsuits around the world. However, the collapse of the largest and most trusted of the regulated funds will accelerate the flight from cryptocurrencies of the remaining large corporate and institutional investors. The “perfect storm” of excess supply can create a powerful red candle, bringing down bitcoin and ether by tens of percent, and if large buyers do not come, then several times. You will have to look for a new balance for about $10,000 and even lower. But if you look without emotion, then even with a long bearish trend, Grayscale has no reason to voluntarily close its funds.. The main losses and risks lie with investors, and Grayscale continues to collect multi-million dollar profits. GBTC has been around for almost a decade and ETHE for over five years. They have already survived several crises, multiplying the assets of early buyers and bringing the operator billions of dollars. Of course, the company may face difficulties. For example, with a class action lawsuit from investors or an investigation by the regulator, because its ten-year history is hardly flawless.. There may also be new changes in legislation that are unfavorable for cryptocurrency funds.. Markets have entered a period of unpredictability, and the best predictions can be destroyed in one day.