The now-defunct crypto exchange FTX may have caused Bitcoin to crash for the second time, albeit to a lesser degree this time. Analysts and many members of the crypto community believe that the recent downturn in Bitcoin’s price is partially due to FTX’s bankruptcy estate’s sale of about $1 billion in shares of Grayscale Bitcoin Trust (GBTC).
Grayscale Bitcoin Trust was once only available on OTC (over-the-counter) markets until January 10th, 2024, when Grayscale’s application to convert it into a publicly available spot Bitcoin ETF. In the 7 days of trading since it has racked up a whopping $3.45 billion in total outflows.
The 7th day of trading was GBTC’s worst yet as it experienced a record outflow, dubbed the ‘Great GBTC Gouge,’ with a net negative impact of $640 million.
Despite efforts by institutional players, termed ‘the Nine,’ to offset this by accumulating $553 million, the overall impact remained significant, this move came amidst a backdrop of high volume for new launches, underscoring the vigorous activity in the crypto market.
LATEST: The Great GBTC Gouge hit record -$640m on Monday, the Nine did their best to offset but fell short w/ a $553m haul. ROLLING NET FLOWS still healthy at +$1b but ongoing battle. The Nine now have a 20% share vs GBTC. Volume also remains very high for new launches in 2nd wk pic.twitter.com/ng0BU8mi6L
— Eric Balchunas (@EricBalchunas) January 23, 2024
FTX’s Great GBTC Gouge: Was the Bitcoin Crash FTX’s Fault?
FTX’s Liquidation and Market Impact FTX’s estate, entangled in a complex bankruptcy process, liquidated over two-thirds of its GBTC holdings, which amounted to 22.28 million shares.
This massive sale, executed shortly after GBTC’s transformation into a spot exchange-traded fund (ETF), played a central role in the dramatic outflows witnessed – the timing coincides with the launch of several spot bitcoin ETFs, including those by heavyweight players like BlackRock and Fidelity, which have since seen significant inflows.
Contrary to expectations of a boost in Bitcoin’s price following the approval of spot Bitcoin ETFs, the digital currency has experienced a downturn. This was of course caused by large volumes of selling pressure dominating buying pressure but it’s impossible to know the exact causes driving these flows.
One of the main factors was almost certainly FTX’s massive liquidation of nearly $1 billion of GBTC shares. While that might not seem like a lot for Bitcoin which has a market capitalization of about $767 billion, the sale equaled over 15% of all Bitcoin trading volume that week (169,561 Bitcoin worth 6.645 billion at the time of writing).
The selling pressure, compounded by FTX’s liquidation, drove Bitcoin below $39k, less than 2 weeks after it was nearing $50k directly following the SEC hack and ETF approval fake-out. However, with FTX’s substantial holdings now offloaded, the community is already speculating that this might ease the selling pressure, potentially stabilizing (or even inflating) Bitcoin’s price.
Grayscale Trust’s ETF Conversion and Fee Controversy
The conversion of GBTC into a spot ETF was a milestone moment, previously structured as a less attractive closed-end fund, GBTC held nearly $30 billion in assets at the time of its conversion.
The conversion was expected to narrow the disparity between the trust’s share price and the underlying Bitcoin’s net asset value.
Nevertheless, Grayscale’s higher fee structure, standing at 1.5% compared to competitors’ 0.2%-0.9%, has been a point of contention, likely influencing investor decisions to exit the fund. With such a simple product like a spot Bitcoin ETF it will be incredibly difficult for Grayscale to argue that its management is worth the extra 0.6%-1.3% fees and may need to lower them soon to avoid further outflows.
The Broader Context: Alameda Research and Legal Entanglements
Adding to the complexity, bankrupt crypto trading firm Alameda Research, tied to FTX, engaged in legal battles with Grayscale, accusing the latter of charging exorbitant fees and enacting a redemption ban.
This lawsuit was recently dropped, further entwining the narratives of FTX, Alameda, and Grayscale in the evolving story of cryptocurrency regulation and institutional involvement.
The story of FTX’s GBTC liquidation is more than a tale of market mechanics; it’s emblematic of the growing pains of an industry at the intersection of rapid innovation and regulatory scrutiny.
Institutional players are increasingly shaping the crypto market, as evidenced by the sheer scale of capital movements and the influence of corporate strategies on market dynamics.
Don’t Forget the Crypto Market’s Fragile Nature
As the cryptocurrency market continues to evolve, the FTX saga and its impact on GBTC offer crucial insights into the interplay of institutional moves, regulatory changes, and market reactions.
Amidst this, the FTX liquidation is a reminder of the market’s fragility and the ongoing need for diligence and strategic foresight in this rapidly evolving space. If a small bankrupt exchange’s estate sale can move the price of Bitcoin, an asset that’s supposed to be worth 3 quarters of $1 trillion, so could a large swath of other unpredictable factors.