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‘Grayscale Discount’ Widens to Record 43% as FTX Contagion Spreads

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Shares of the Grayscale Bitcoin Trust (GBTC), the world’s largest publicly traded crypto fund, are trading at a new record discount of 43% relative to the price of the underlying bitcoin (BTC).

Crypto analysts are speculating as to the reason, but the added pressure comes after Genesis Global Capital, an arm of Digital Currency Group (DCG), owner of Grayscale Investments, which manages GBTC, announced this week that it would halt customer withdrawals from its lending unit – stemming from the fallout from the collapse of Sam Bankman-Fried’s FTX crypto empire. (CoinDesk is an independent subsidiary of Digital Currency Group, known as DCG.)

Grayscale Investments reassured investors on Wednesday that the Genesis was “not a counterparty or service provider for any Grayscale product,” and that Grayscale products would “continue to operate business as usual.”

The GBTC shares have not traded at a premium to the underlying bitcoin since March 2021, according to data from Coinglass, and the discount has widened this year along with distress in crypto markets and the U.S. Securities and Exchange Commission refusal to allow a conversion of the fund into an exchange-traded fund.

GBTC is an investment vehicle that allows U.S. investors to gain exposure to price movements of BTC without buying the asset itself. The crypto fund Three Arrows Capital was a large holder of GBTC, and told Bloomberg in July that arbitrage trading the premium was one of the factors that led to its collapse earlier this year.

For some investors, the recent widening of the discount may have made the vehicle even more attractive: Bloomberg reported that Cathie Wood’s Ark Investment Management bought more than 315,000 shares worth roughly $2.8 million of GBTC shares earlier this week.

This week’s move by Genesis has sparked speculation online that Grayscale might alter its current strategy, which consists of keeping the fund going while simultaneously suing the U.S. Securities and Exchange Commission over the agency’s rejection of the ETF conversion.

According to QCP Capital, many observers are now expecting DCG to “use the most liquid part of the business – Grayscale – to shore up Genesis and other parts of the business.”

“We had written off a potential sale of GBTC’s BTC assets in our 2022 year outlook, although we never expected it to be under such circumstances,” said QCP in a note Friday.

The friction is that Grayscale would then have to give up rights to a contractual stream of fees, currently 2% of assets under management.

There’s also the question of DCG’s own holdings of GBTC. In October 2021, DCG said in an announcement it had purchased $388 million worth of GBTC shares.

QCP said that “those expecting GBTC to allow a one-off redemption for Genesis to meet liquidity needs are misguided, as this has to be done with the SEC’s approval.”

“With all of the SEC’s opposition to GBTC this year, we certainly don’t expect this to happen anytime soon,” QCP wrote. “On the bright side this also means a low chance of a large one-off BTC selling pressure from this.”

Neither Grayscale Investments nor Digital Currency Group responded to CoinDesk’s request for comment.

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