What does it mean if the rumor that "Grayscale dissolves GBTC" is true?

This afternoon, a rumor about GBTC instantly sparked market discussions.

The source of the news comes from Autism Capital, a crypto KOL who has been very active recently. It said that there are market rumors that the crypto trading and lending institution Genesis may have solvency problems. In order to fill the hole, Genesis's parent company DCG may choose to dissolve GBTC and ETHE issued by another company under its umbrella, Grayscale.

First of all, it should be noted that Autism Capital also stated in a personal tweet that the rumor has not been confirmed, and Odaily Planet Daily will continue to follow the relevant progress. But suppose, suppose, suppose this rumor is true, what does it mean? Why does Genesis bankruptcy involve GBTC and ETHE? After analysis, we roughly made some guesses around six core questions:

• Core question 1: How big is the hole?

First of all, the background of this incident is that Genesis has a certain financial hole. Previously, the agency also stated that $175 million of its derivatives department was trapped in FTX, but then DCG provided Genesis with $140 million in equity investment.

A simple calculation will show that the difference is still 35 million US dollars. If the funding hole is only this small, it is obviously not enough to drag down the GBTC worth tens of billions of dollars.

Well, if the rumors are true, it means that Genesis has other financial loopholes besides the $175 million, and the size of the loophole has exceeded Genesis's own ability to bear, and will involve the interests of DCG's decision-makers, so DCG will choose to "abandon the car to save the pawn."

• Core question 2: What does Genesis debt repayment have to do with GBTC?

According to a document released by the U.S. SEC in October this year , in addition to being a sister company of Grayscale, Genesis has also previously participated in the issuance of GBTC as a distributor.

In addition, some news reports in 2021 also showed that DCG bought a large amount of GBTC after GBTC had a negative premium.

Therefore, we can speculate a possibility that in order to help Genesis fill the hole, DCG needs to use its own part of GBTC.

• Core Question 3: Can’t I just sell GBTC directly?

Considering that GBTC currently has a large negative premium and limited market liquidity (an average of 4.75 million shares traded per day, currently priced at US$9.68 per share).

It can be speculated that it is difficult for the GBTC market to take on the number of chips that DCG wants to sell. Even if it is sold, a huge value will be lost, so the sacrifice of selling GBTC directly is huge.

• Core question 4: Can I sell the BTC behind it?

It should be noted that the BTC, which is the supporting asset behind GBTC, is currently stored in the cold wallet of Coinbase Custody, and due to the fund nature of GBTC, the fund currently does not support reverse redemption from GBTC to BTC.

There are two ways to use GBTC to exchange back the BTC in the cold wallet: one is to convert the fund nature of GBTC into a spot ETF (this is also the direction that Grayscale has been working towards); the other is to go the dissolution route.

It is worth mentioning that to maintain the operation of the fund, Grayscale can charge a 2% management fee each year. Based on the current fund size of approximately US$10 billion, this is US$200 million, which is far greater than the hole that Genesis has already exposed.

• Core Question 5: What is the process of dissolution?

It's very simple. Just follow the corresponding legal channels. The general process is: determine the required approvals - prepare a plan - the board of directors reviews and approves the liquidation - issue a fund liquidation announcement to shareholders and the public - start converting the investment portfolio into cash or cash equivalents; pay debts and/or set aside reserves - close or stop.

Obviously, this will be a long process.

• Core Question 6: If dissolved, how will BTC be returned to GBTC investors?

The specific details will be decided by the fund unitholders' meeting attended by relevant stakeholders (fund managers, custodians, holders, etc.).

Considering that many investors who purchased GBTC are special funds that cannot directly purchase or hold BTC, it is not ruled out that they will choose to repay in cash, which means that Grayscale needs to sell part of its BTC reserves... You know what this means.

• Special clarification

All of the above speculations are based on the rumor that "DCG will dissolve GBTC and ETHE to help Genesis". They are just to help readers sort out some potential logical relationships, but based on the current situation, the probability of this event happening is not high.

How this matter will ultimately develop still requires us to wait for the results of the creditors' meeting to be held by Genesis at 8:00 a.m. Eastern Time on November 17 (21:00 Beijing Time on November 17).