Submitted by QTR’s Fringe Finance
Amidst the heightened scrutiny on basically all structured crypto products following the blowup of FTX, many players in the crypto space are rushing to reassure their clients and the investing public that their assets are real, unencumbered and safe.
The grandfather of all bitcoin structured products, the hugely popular Grayscale Bitcoin Trust, has seen its discount to NAV plunge to almost -50% from about 0% in the beginning of 2021 as bitcoin has fallen in price.
In other words, if you want to buy bitcoin, and you trust that Grayscale’s assets are safe and sound, buying their trust here would essentially allow you to buy bitcoin for an additional 50% off its spot price.
It sounds too good to be true, right? That’s what many skeptics continue to point out. Why would the trust trade at such a massive discount? Could it be due to a reasonable explanation? Perhaps its just a technical glitch as many people are selling at any price do to the volatility in the space right now? Perhaps it is due to forced liquidations of people who held GBTC, opening the door for opportunities to those who have cash on the sidelines?
The truth is we just don’t really know. But…the simplest way for Grayscale to close the price/NAV gap would be to reassure investors that its trust’s holdings are exactly as they seem, making the case easy for arbitrageurs to pounce on what could be a significant discount not just if the price of bitcoin rises, but even if it falls less than the current discount but Grayscale is somehow able to shore up the difference.
As of yesterday, the Grayscale Bitcoin Trust was trading at a massive 43% discount to its NAV, Peter Schiff, who has traded barbs with Grayscale CEO Barry Silbert on Twitter often, noted:
Today the #Grayscale Bitcoin Trust traded at a 43% discount to its NAV. With #Bitcoin trading at $16,700, shareholders of $GBTC were willing to sell their Bitcoin for the equivalent of $9,500. What does that tell you about retail and institutional investor confidence in Bitcoin?
And so on Friday after the market closed, Grayscale took to its Twitter account to try and make a statement to shore up investor confidence. I’m not sure the company got the reaction it was looking for.
The company’s entire Tweet thread can be viewed here. Grayscale said they were providing “additional information about the safety and security of the assets held by our digital asset products”.
They told readers that “each of Grayscale’s digital asset products is set up as a separate legal entity” and that the company’s “laws, regulations, and documents that define Grayscale’s digital asset products prohibit the digital assets underlying the products from being lent, borrowed, or otherwise encumbered.”
That’s a good start.
They also noted that all of their digital assets are being held by Coinbase Custody Trust Company, LLC. They provided a letter from Coinbase, dated November 18, 2022, that appeared to attest to the amount of digital assets Coinbase held for them – as of the end of September.
Also a good step in the right direction.
But that’s where the verification stopped. The company didn’t turn over any of its on-chain wallet information, instead noting that “Coinbase frequently performs on-chain validation”. It’s also unclear to me whether or not the Coinbase document attests to current holdings by the trust, as it appears to have everything dated as of September 30, 2022 – the last date of the quarter.
Of course, FTX’s blowup took place just weeks ago, and this is the pressure point of volatility that the industry is concerned about. Should any changes in the trusts have taken place due to FTX’s turmoil and the “run on the bank”, it would have likely been after September 30, 2022.
Grayscale continued: “Due to security concerns, we do not make such on-chain wallet information and confirmation information publicly available through a cryptographic Proof-of-Reserve, or other advanced cryptographic accounting procedure.”
They continued: “We know the preceding point in particular will be a disappointment to some, but panic sparked by others is not a good enough reason to circumvent complex security arrangements that have kept our investors’ assets safe for years.”
Then, they linked to the following document, with more information about their products.
“Due to recent events, investors are understandably inquiring deeper into their crypto investments. Custody of the digital assets underlying Grayscale’s digital asset products is unaffected, and our products’ digital assets remain safe and secure,” it reads.
It then appears to make a more recent, concrete attestation:
For example, this means that Grayscale Bitcoin Trust (OTCQX: GBTC) holds bitcoin — and only bitcoin — and each share is backed by a proportional amount of the trust’s holdings, approximately 0.00091502 BTC per share of GBTC, as of November 18, 2022. To be perfectly clear: these digital assets are owned by GBTC and GBTC alone.
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I’m not one to try and weigh Grayscale’s statements versus the clarity of on-chain validation, but isn’t that what the point of the blockchain actually is? Wasn’t it sold to so many people under the guise that anybody could have access and validate anyone else’s assets?
If Grayscale has the assets it claims, and I’m not saying that they don’t, it still seems to be outside the spirit of the entire “decentralized” and “blockchain” cult that touts its transparency and openness as one of its biggest strengths.
Why provide confirmation from the custodian but not verification on the blockchain?
I was also alarmed by the number of people who responded to Grayscale’s Twitter thread, thrashing the company for not providing more information.
“No one cares until you show exact on chain proof of reserves and state of your debt vs. reserves along with how much you are sucking out exactly to every executive and employee you have,” one person responded.
Other responses looked like these:
Another Twitter user wrote: “Making a public statement trying to quell fears while refusing to perform a proof of reserve is far worse than not making the statement. This will exacerbate the concerns and I expect the GBTC discount will reflect this sentiment.”
I spoke with the owner of the @Bitfinexed Twitter account, who has long been a skeptic of the industry and has predicted that blowups like FTX would be coming. When I asked them if the security angle was real, they replied:
“No, it’s not. Showing a public bitcoin address is zero risk.”
As an example, they provided me with Binance’s wallet address.
“Binance can sign a message to prove that address is under their control,” they told me. “Nobody can steal it and Binance can prove it is theirs.”
A second crypto expert, @MagooPhD on Twitter, told me that they did think there was some validity to the security argument. They told me “realistically if you expose where the coin is kept you let potential bad parties know where to start looking.”
They continued: “Like being able to see when coin movement is done. You can start to sync that to real world events and locations. It’s like disclosing where a safe is in a house – or even that there is a safe in a house.”
Despite this, they called Grayscale’s statement “kind of weird”, adding that no one had claimed their bitcoin didn’t exist to begin with.
Whether or not this attempt at shoring up confidence in the trust worked or not, we’ll likely know Monday morning. The important thing to watch won’t be the price of bitcoin, it’ll be the price/NAV of the trust. If the discount gets larger, the market likely isn’t buying what Grayscale has to say. If the discount closes, it means Grayscale has added little burst of confidence to the market.
But the old saying goes…trust, but verify. Personally, even if Grayscale’s assets are fine, as they say they are and may very well be, the company may have done itself a disservice in how they communicated this to the world, after market close, on a Friday.
Is it 9:30AM Monday morning yet?
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