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DCG Solvency Concerns Mount Pressure on Grayscale Crypto-Based Trusts

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The average monthly assets under management (AUM) and daily volumes of crypto investment products declined in 2022, reflecting the suppressed state of digital asset markets. The latter figure shrunk in December by almost three quarters from$781 million in 2021 to $203 million, while the average monthly AUM fell by roughly 40% to $31.9 billion.
The first week of the new year has delivered nothing in the lines of relief for investment firms dealing with crypto-focused investment products. Grayscale's precarious end to the year has built up to become a chaotic start. It doesn't help that the parent firm, Digital Currency Group, is at the same time speculated to be facing liquidity issues after being caught in the FTX contagion. Grayscale battles against the US markets regulator (SEC) on its agenda to convert its Bitcoin Trust to an exchange-traded fund (ETF) product, while its parent DCG has hands tied addressing the matter with Gemini.
Grayscale's ETHE vehicle sets record discount to NAV in December
Steep discounts to Grayscale's Ethereum, Litecoin and Bitcoin Cash Trusts have raised eyebrows among market observers. The Grayscale Ethereum Trust (ETHE) and Grayscale Bitcoin Trust (GBTC) products are currently at a huge discount or premium to net asset value (NAV) as investor interest keeps falling.
ETHE's trading discount has been declining from an all-time high of 3,500% sometime in June 2020, reaching -59.34% at press. Besides the general uncertainty in the future of crypto markets, the lucrativeness of the ETHE has withered due to concerns about whether the fund will be redeemable any time soon.

ETHE Discount chart. Source: Ycharts
The case has been the same for GBTC, which had a 46.07% discount to NAV at press time, having traced an all-time dip to 48.89% earlier, on Dec 13.

GBTC Discount chart. Source: Ycharts
Meanwhile, the US SEC has been unmoved in its stance to deny approval of a spot Bitcoin ETF, a factor that may have contributed to the pullback on GBTC. Grayscale has already indicated that it would consider returning a portion of the investors' capital if the regulator persists with the denials. One consideration is to tender as much as a fifth of outstanding GBTC shares.
Grayscale could trim its portfolio to raise funds
Now should it come to it that Grayscale needs to liquidate to raise cash for its huge creditors, such as Genesis, the Digital Currency Group (DCG) subsidiary could dump some of its underwhelming altcoin trusts. Tokens, including Ethereum Classic (ETC), risk the chop, having slashed their market cap further. Given that Grayscale controls about 8.5% of its market cap, a dump could send the prices dwindling further. Grayscale also controls 2.4% of Ethereum's market cap, as it manages assets worth $3.7 billion in its Ethereum trust.
Valkyrie offers to manage Grayscale's Bitcoin Trust
Looming concerns around the performance of Grayscale's flagship product, Grayscale Bitcoin Trust (GBTC), have attracted rival firms eyeing the reigns of the fund amid the market chaos. Digital asset investment firm Valkryie has been circling and is the first to table its offer to assume control of the fund publicly. The Nashville-based alternative asset manager pitched its proposal to take over operations in a Dec 28 post, specifically addressing the opportunity on the shelf. CIO Steven McClurg outlined the measures its team plans to take to improve the fund's current stewardship.
Pitching newly-surfaced interest for a negotiation, the executive cited a “proven track record in […] digital asset management” as one of the arguments supporting its qualification for the ‘sponsor and manager' role. Notable among influential crypto figures with documented ties to Valkyrie is Tron founder Justin Sun who has a significant stake in the asset manager's largest division Valkyrie Digital Assets. The firm's co-founder also noted that Valkyrie would seek to deliver to GBTC shareholders as a priority. To further support the case, McClurg announced the launch of a Valkyrie Opportunistic Fund, LP. The product reportedly targets an initial $75 million and seeks to exploit “the massive discount in the spread between the net asset value (NAV) and price of GBTC”, which hit an all-time low of 48.89% earlier this month, Dec 13.
The proposal, albeit a long shot, will require a vote approval (proxy vote) from the current GBTC shareholders. Worth mentioning, the fund in question has some kinks to be ironed out and is also the subject of contention in the ongoing lawsuit against the US Securities and Exchange Commission by Grayscale. The latter firm resorted to legal challenges in its bid to convert the fund into an Exchange Traded Fund (ETF) after the US market regulator rejected its applications. Grayscale has been unwavering in this quest and recently suggested other possibilities, according to a recent WSJ report.
SEC gets in the way of Binance.US acquisition deal of Voyager Digital
On Wednesday, the US financial regulator the Securities and Exchange Commission (SEC) filed a limited objection to the subsidiary's proposed takeover of crypto lender Voyager Digital. The regulator cited a lack of supporting details for the acquisition of customer assets from the lending firm which filed for bankruptcy in July. Voyager filed for bankruptcy in July. The Gensler-led commission also requested clarity on several issues including customer reimbursement, the course of action if the transactions fail. Binance’s US-operating division, Binance.US showed interest in acquiring Voyager's assets, following up with a bid worth $1.022 billion, which the latter confirmed it had agreed to.
Sam is a financial content specialist with a keen interest in the blockchain space. He has worked with several firms and media outlets in the Finance and Cybersecurity fields.